Employers are required by law to withhold employment taxes from their employees. Employment taxes include federal income tax withholding and Social Security and Medicare taxes. To figure out how much tax to withhold, use the employee’s Form W-4, appropriate method and withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. Employers should deposit withholdings based on their business and amount withheld.
Employers are required to file returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation paid to employees. Each employee needs a copy. Use Form W-3, Transmittal of Wage and Tax Statements, to transmit Form W-2 to the Social Security Administration.
Know the Details
The situation can get complicated when both employee and employer have to contribute. For example, the current tax rate for Social Security is 6.2% for the company and 6.2% for the employee. For Medicare, the current rate is 1.45% for the employer and 1.45% for the employee. Also, an Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. You will withhold an Additional Medicare Tax of 0.9% for single filers who make more than $200,000, and for married couples filing jointly, the threshold is $250,000, but if filing separately, $125,000. You do not need to match this additional portion.
Employers report and pay Federal Unemployment Tax Act (FUTA) tax separately from federal income tax and Social Security and Medicare taxes. FUTA tax is only paid from the employer’s funds. Employees do not pay this tax or have it withheld from their pay.
See Employment Tax Due Dates for information about what and when to file. The matching share of the Social Security and Medicare payroll taxes is collected as the Federal Insurance Contributions Act taxes, and the business’ part is considered a business expense, not a liability. Since it is a business expense, it can be written off at tax time.
Do Not Forget the States
This is just the beginning of an employer’s responsibilities, who is likely subject to state withholding rules as well. It is essential employers know the general rules and any annual rate changes. Understanding these tax issues is important since the employer is responsible for fulfilling tax obligations related to their employees. To avoid penalties and late fees, it is important to send out payments on time. Be sure to work closely with financial professionals to ensure your are compliant.