Payroll Taxes

Add Payroll Taxes - Choosing the Right Method

There are two methods of calculating the employer responsibility for payroll taxes. You want to use one of these methods to avoid doubling the payroll tax.

• Automatic: controlled by the Config settings along with the tax status settings on pay types and positions
• Pay Type: By assigning pay types with appropriate percentages to each position to be taxed

You can use the automatic method for calculating payroll taxes if both of these are true:

• You use a single GL account for both the Social Security and Medicare components of FICA.
• You have no employees whose compensation is high enough to be affected by the Social Security tax limit, or if the difference that this would make in your budget is minimal enough that you wish to disregard it.  (Social Security tax limit is set by the IRS each year. For 2022, it is $147,000.  No Social Security tax is due on compensation above that amount.)  

You must use the pay-type method for calculating payroll taxes if either of these are true:

• You use separate GL accounts for the Social Security and Medicare components of FICA.
• You have employees affected by the Social Security tax limit and you want to budget more precisely for the effect on employer payroll tax.

Note: This document is written from the perspective of US payroll tax requirements. Martus also supports payroll tax methods in other countries. The automatic method is of limited usefulness outside the US, but the pay-type method is very flexible and supports a wide variety of payroll tax requirements. Martus Support can help to configure pay types for payroll tax needs in countries outside the US.

Using the Automatic Method for Payroll Taxes

Three settings work together to determine what compensation is taxed.

• The Config settings define the tax rate for each fiscal year.

Using Pay Types to Calculate Payroll Taxes

If you use the pay-type method, you will create pay types for payroll tax and assign them to positions. (You will not assign them to positions that are not subject to payroll tax.)  

Each payroll pay type is associated with source pay types (such as Salary, Wages, Bonus, etc.)  When you assign a payroll tax pay type to a position with any or all of these source pay types, the tax amount is calculated automatically. If you change the rate for any of the source pay types on that position, the payroll tax amounts are updated automatically.  

If you use separate GL accounts for Social Security and Medicare, you will need two separate pay types. You’ll only need one pay type if you only use one GL account for FICA (and chose to use the pay type method because the Social Security tax limit has a significant impact on your compensation budget).

This example illustrates how to set up a pay type for Social Security tax.

Tax – Use the dropdown to set this to Is Tax.  (Non-taxable is also acceptable, although the Is Tax setting supports additional features within Martus.)

For each percentage pay type, assign the source pay types which are to be used as the basis for the payroll tax calculation.  The illustration shows just three source pay types, but you can assign as many as you need. This makes the payroll tax dependent on these source pay types.

Notes:

• When you use the automatic method, payroll tax is not shown on the Position screen or on the Detail screen.  You can see payroll tax on the Summary screen, although you’ve also got a flag on that screen so that you can exclude taxes from the display.
• Whenever you post a scenario to a Martus budget, the calculated payroll tax is always included.
• If you use the automatic method, be sure to verify the Config rates each year as you prepare for budget season!

Using Pay Types to Calculate Payroll Taxes

If you use the pay-type method, you will create pay types for payroll tax and assign them to positions. (You will not assign them to positions that are not subject to payroll tax.)  Each payroll pay type is associated with source pay types (such as Salary, Wages, Bonus, etc.)  When you assign a payroll tax pay type to a position with any or all of these source pay types, the tax amount is calculated automatically. If you change the rate for any of the source pay types on that position, the payroll tax amounts are updated automatically.  

If you use separate GL accounts for Social Security and Medicare, you will need two separate pay types. You’ll only need one pay type if you only use one GL account for FICA (and chose to use the pay type method because the Social Security tax limit has a significant impact on your compensation budget).

This example illustrates how to set up a pay type for Social Security tax.

Tax – Use the dropdown to set this to Is Tax.  (Non-taxable is also acceptable, although the Is Tax setting supports additional features within Martus.)

Category – Use the dropdown to set to this to Percentage.

Frequency – This must be set to Month.

Limit – This specifically supports the US Social Security tax limit, where the employer responsibility for payroll tax is calculated until the employee’s compensation exceeds the limit.  For the Social Security pay type, enter the result of multiplying the tax rate (currently 6.2%) by the annual limit established by the IRS for the calendar year in which your fiscal year starts. For example, if your fiscal year starts in July 2022, use the 2022 tax limit ($147,000) as the basis for this calculation.  

Leave the Limit blank if you have no employees whose compensation is high enough to be affected by the Social Security tax limit, or if the difference that this would make in your budget is minimal.  

Calendar Limit – If your fiscal year starts in January, or if you have not set a Limit above,  leave this blank.  If your fiscal year starts in any month other than January and you specified a limit, then select this checkbox. The limit calculation will take the payroll tax presumed to have occurred in the months between January and the start of the fiscal year into consideration.

Employer Percent – This should be set to 100% for all payroll taxes.

Source Percent – Enter the tax rate here. For US Social Security, the current rate is 6.20. For US Medicare, the current rate is 1.45.

Add the Pay Type to the Position

Once you have set the pay item up you then can add the pay type to the employee under Personnel > Scenarios >Positions > click the pencil icon of the position you want to edit > click 'Add Pay Type'

The Taxable flag on each position. When set, the tax percentage defined in the Config settings is used to calculate payroll tax on any taxable pay types assigned to this position. This should be left blank on positions to which payroll tax does not apply.

For each percentage pay type, assign the source pay types which are to be used as the basis for the payroll tax calculation.  The illustration shows just three source pay types, but you can assign as many as you need. This makes the payroll tax dependent on these source pay types.

Notes:

• When you use the pay-type method, the Taxable flag on positions is ignored.
• If you use the pay-type method, be sure to review the rates and limits each year, in preparation for budget season.

Viewing Payroll Taxes

The Summary screen has a checkbox that controls the display of payroll tax information. This applies to automatic payroll taxes and Is Tax pay types.  

The Detail screen only shows payroll tax information if you are using the pay-type method.  Taxes calculated with the automatic method do not show on the Detail screen.