Tom Copeland describes this method in detail in a Resources for Child Caring article.

Payroll taxes for California employers consist of taxes paid by the EMPLOYER:

• Half of social security and Medicare
• State unemployment insurance
• State employer training tax

And taxes paid by the EMPLOYEE:

• The other half of social security and Medicare
• State disability insurance (SDI).

Employers using the method described in this article choose to pay the employee's taxes as well as their own, either by choice or because they failed to withhold the employee taxes shown above from a worker's pay.

...

This simplifies things on paydays somewhat because you no longer have to calculate or withhold social security, Medicare or SDI when writing out paychecks. You write each paycheck for the employee's full hourly wages, without deductions. (Except that you may have to deduct income taxes using the appropriate tax tables. More on that later.) Then you pay all the payroll taxes yourself when you file your quarterly payroll tax returns (assuming you are a quarterly payer). You will pay somewhat more in taxes, but you may save time and/or payroll service fees. (For a complete discussion of payroll taxes see my Payroll Tax Guide.)

I have used this method when paying my own employees in the past, but came to the conclusion that it made the paperwork more complicated, not less. Now I use it exclusively in the situation where a client didn't withhold taxes from workers' paychecks. That being the case, the employer client really has no choice but to pay all of the payroll taxes, unless the employee agrees to pay back amounts that should have been withheld for social security, Medicare and state disability insurance.

I don't recommend this method in normal situations. The simplification on paydays is more than outweighed by the complication when preparing payroll tax returns.

Before you proceed, be aware of the following:

(1) You must withhold federal and state income taxes from your employee's wages if their income is high enough. Use the tables in the IRS Employer's Tax Guide and California PIT Withholding Schedules to determine if income tax withholding applies to your employee's paycheck.

(2) Paydays will be simpler, but preparing your quarterly payroll tax returns will be more complicated. When you pay the employee's taxes yourself, this is considered as additional taxable wages to the employee. Therefore, the wages that you report quarterly and on the employee's W-2 will include their cash wages and something extra. You must do some math to "gross up" your employees' wages and determine their taxable wages.

In Scenario Two of Tom Copeland's article he divides the employee's wages by 0.9235 to arrive at taxable wages. This takes into account only federal payroll taxes, however. California employers should divide employee wages by the "Gross Up" Factors shown below.

The Gross Up Factors are arrived at by adding together employee tax rates for social security, Medicare and state disability insurance and then subtracting that total from the number one:

2008 California Gross Up Factor = 1 - (0.062 + 0.0145 + 0.008) = 0.9155

2009 & 2010 California Gross Up Factor = 1 - (0.062 + 0.0145 + 0.011) = 0.9125

This "gross up" calculation is the exact opposite of simplification, in my opinion! Much easier to actually calculate the taxes on paydays and do the withholding.

Here's a link to my complete Payroll Tax Guide and my affordable Payroll Service page.

Last updated: 27 January 2010

Posted on 2007-07-06 03:10:37