Understanding Employment Taxes: A Guide

Employment Taxes: What are They?

If you own a business with employees, or you want to understand what is being taken out of your paycheck, it’s important to understand employment taxes. Federal, state, and local taxes must be paid on time.

Certain taxes must be withheld from paychecks. Here we will be outlining the different types of employment taxes. So, what are employment taxes?

Employment taxes include the following:

1. Federal income tax withholding

2. Social Security and Medicare taxes

3. Federal unemployment tax (FUTA)

Federal Income Taxes

You generally must withhold federal income tax from wages paid to an employee. Form W-4 is used to determine the specific amount, although most payroll services or your accountant will do this for you.

Social Security and Medicare Taxes

Social security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits for the retired, survivors, and disability insurance distribution provisions of FICA.

Medicare tax pays for benefits under the medical care provisions of FICA. As an employer, you must withhold a percentage of these taxes from employee and match the withholding amount.

In general, you must deposit these taxes by check or cash to an authorized financial institution, typically your bank.

Check with your tax professional to make sure you are not required to use the Electronic Federal Tax Deposit System (EFTPS).

Regardless of the payment method, you will then report them on Form 941, the Employer’s Quarterly Federal Tax Return

Electronic Federal Tax Deposit System (EFTPS)

Most employers are required to use the Federal Tax Deposit System but, there are some exceptions, such as very low deposit liability or businesses that are otherwise approved for a waiver.

Dated 26 August 2022, here is some current information from the IRS about who is required to make their payments with the Electronic Federal Tax Deposit System (EFTPS).

Federal Unemployment Tax (FUTA)

FUTA is a combined federal and state program that provides unemployment compensation to the unemployed.

As a business owner, you are solely responsible for paying this tax, to wit, nothing is withheld from the paychecks of your employees. FUTA is determined by using Form 940, but you are encouraged to use a tax professional to determine payment amounts.

Employment taxes can be frustrating for a small business owner. They are, unfortunately, a necessary evil as your business grows.

  • Your Employer must pay and withhold the various federal, state, and local taxes.
  • Employment taxes include federal income tax withholding, Social Security/Medicare taxes, and Federal Unemployment Tax (FUTA)
  • Employers must deposit and report these taxes but, FUTA is solely paid by your employer.

Here are some further explanations:

Businesses are required to pay and withhold the taxes explained above.

  • Including taxes on employee wages, such as income tax, Social Security and Medicare taxes, and unemployment taxes.
  • The exact taxes and rates vary depending on the location and size of the business.

Withheld from your paycheck typically include:

  • Federal income taxes
  • Social Security/Medicare taxes (also known as FICA taxes)
  • Federal Unemployment Tax (FUTA)
  • Generally speaking, these taxes are based on the size of your check

Employers are responsible for depositing and reporting employment taxes to the appropriate government agencies.

  • FUTA is a tax that is solely paid by employers and is not taken out of your check.
  • This tax funds unemployment benefits.

Employment taxes are a necessary part of growing a business.

1. By law, employers must comply with tax regulations and pay any employment taxes on time.

2. Failure to pay will result in penalties, fines, and legal problems.

3. Proper tax management is essential for any successful and compliant business.

Employment taxes may be something you’d rather not have to deal with, but they are a necessary part of running a compliant and successful business.

It’s important to understand your responsibility for paying and withholding employees’ employment taxes. Proper tax management and compliance can help avoid penalties, fines, and legal problems down the line.

3 Frequently Asked Questions

Related to Employment Taxes and Their Brief Answers:

How are federal income taxes calculated for employee withholding?

Federal income tax is calculated based on the number of allowances the employee claimed on Form W-4. The more allowances claimed, the less tax is withheld.  The IRS provides tax withholding tables to calculate the correct amount withhold.

Do employers have to match employee social security and Medicare tax withholdings?

Yes, employers do have to match the amount of social security and Medicare taxes withheld from their employees’ paychecks. The current social security tax rate is 6.2%, and the Medicare tax rate is 1.45%.

How often do employers have to deposit and report employment taxes?

Employers must deposit employment taxes regularly, usually quarterly along with filing quarterly employment tax returns and the total figures using Form 941.

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