Daycare Tax Tips

When an Employer Pays 100% of Payroll Taxes

Use this method if you forgot to withhold taxes from paychecks

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

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

And taxes paid by the EMPLOYEE:

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 employee taxes from paychecks. They pay somewhat more in payroll taxes, but may save time and/or payroll service fees.

This method simplifies things somewhat because you no longer have to calculate or withhold social security, Medicare or SDI when paying employees. You simply write each paycheck for the employee's full hourly wages, minus any necesarry income tax withholdling. (Details below.) Then you pay all the payroll taxes yourself when you file your quarterly payroll tax returns, assuming you are a child care provider or other small business eligible to make employment tax payments quarterly. Most employers pay employment taxes monthly. For more information see my Payroll Tax Guide.

I have paid employees using this method in the past, but came to the conclusion that it made the paperwork much MORE complicated. I now use it only when helping employers who didn't withhold any taxes from workers' paychecks. In that case, the employer really has no choice but to pay all of the payroll taxes, unless an employee agrees pay back amounts that should have been withheld.

I don't recommend using this method in normal situations. Before you proceed, be aware of the following:

(1) You must withhold federal and state income taxes from employee 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 an 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 treated 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, plus something extra.

Calculate total taxable wages by "grossing up" each California employee's wages, as follows:

Divide total cash wages for each employee by the appropriate Gross Up Factor, which is calculated by adding together employee tax rates for social security, Medicare and state disability insurance and then subtracting that total from the number one.

2012 & 2013 & 2014 California Gross Up Factor = 1 - (0.062 0.0145 0.01) = 0.9135

2011 California Gross Up Factor = 1 - (0.062 0.0145 0.012) = 0.9115

For current tax rates and other payroll information, refer to my complete Payroll Tax Guide.

Last updated: 17 December 2013

Posted on 2007-07-06 09:10:37