What Employers Need to Know About Employment Taxes

Employment taxes fall into several different categories—those paid by the employee; those that the employer must match; and still, those that the employer must pay solely. Let’s look at the categories of employment taxes and the accompanying forms that must be filed.

Federal and state income taxes must be withheld by an employer from an employee’s paycheck. Although not all states collect income tax, federal income tax must be paid by all employees. Before an employee begins working for an employer, he/she will need to complete an Employees Withholding Allowance Certificate, IRS Form W-4, which gives the employer the information needed to determine the amount of taxes that must be withheld from an employee’s paycheck. The IRS recommends that employees consider completing a new W-4 Form yearly, or at least when their financial situation changes. The more allowances an employee claims on their W-4, the less is withheld from their paycheck for taxes. The IRS has withholding tables that are used to determine the amount of taxes that must be withheld based on the employee’s W-4 Form.

Social Security (FICA) and Medicare taxes must be withheld from payments to an employee. The employer must also match the employee’s FICA and Medicare taxes, and pay these taxes when the employee’s taxes are paid.

For 2016, the social security tax rate is 6.2%. This means that the employer must withhold 6.2% of the employee’s earnings and must also match that 6.2%, for a total of 12.4% to be paid for social security taxes. The social security wage base limit is $118,500, meaning that once an employee has been paid $118,500 for the year, no further social security tax are to be collected. 

The tax rate for Medicare is 1.45%. Again, the employer must withhold 1.45% of the employee’s earnings and must match that1.45%, for a total of 2.9% to be paid for Medicare taxes. There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

All withholdings are required to be deposited with the IRS electronically using the Electronic Federal Tax Payment System for federal income tax and FICA withholdings.

Once an employee’s wages and compensation exceeds a specific threshold amount based upon the employee’s filing status (single, married filing jointly, etc.), the employer is responsible withholding an additional 0.9% Additional Medicare Tax, starting with the pay period in which wages and compensation in excess of the threshold amount are paid to an employee. There is no employer match for the Additional Medicare Tax.

Employers must also pay Federal Unemployment Taxes. Employees do not contribute to this Tax; it is paid directly by the employer. In certain states, employers may also be required to pay a state unemployment tax in addition to the Federal Unemployment Tax. These taxes cover unemployment compensation to those who have lost their jobs. Form 940, the federal unemployment tax return, must be filed yearly to report these taxes.

If your business doesn’t have any employees other than yourself, you may have to pay self-employment taxes, which cover Social Security and Medicare tax for individuals that work for themselves.

At the end of the year, employers must prepare and file a Wage and Tax Statement, Form W-2, for each employee, which reports the wages, tips, and other compensation paid to that employee during the year. This form is sent to the Social Security Administration using Form W-3, Transmittal of Wage and Tax Statement. Form W-3 summarizes the total wages, Social Security wages, federal income tax withheld, and FICA tax withheld from employees during the year.

Employers must also file Federal Form 941, the Employer’s Quarterly Federal Tax Return, each quarter, which reports the quarterly taxes withheld and the employer’s portion of Social Security and Medicare taxes for that quarter.

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