All About Payroll Taxes

Employers are responsible for filing and reporting employment taxes. At the end of the year, employers must prepare Form W-2. The purpose of the form is to report wages, tips, and other compensation paid to an employee. Employers must also use the W-3 form. The form is used to transmit data on Form W-2 to the Social Security Administration.

Employers must withhold different categories for the IRS, including federal income, Social Security and Medicare, additional Medicare, federal unemployment (FUTA), and self-employment taxes.

Federal income tax is generally withheld from the employee’s wages. To calculate how much to withhold from an employee’s wages, employers need to refer to two things: the employee’s Form W-4 and the withholding tables, found in Publication 15, Employer’s Tax Guide. Employers must deposit with holding companies. There are two deposit schedules: monthly and biweekly. The schedules determine when an employer must deposit Social Security, Medicare, and withheld income taxes. “These schedules tell you when a deposit is due after a tax liability arises” (IRS.gov, “Publication 15”, 8/29/2013). The deposit schedule an employer uses is based on the total tax liability reported on Form 941. With this in mind, the deposit is not based on how often the employer pays its employees.

When it comes to Social Security and Medicare taxes, employers must withhold a portion of the employee’s wages and also match the amount. Employers refer to Publication 15 and Publication 15-A, Supplemental Tax Guide for Employers for instructions on how much to withhold from employee wages. Employers are required to deposit the amounts they have. At the time of this writing, “for 2013, the employee tax rate for Social Security increased to 6.2%. The Social Security wage base limit increased to $113,700” (IRS.gov, “Understanding employment taxes”, 8/29/2013). The employee tax rate for Medicare is 1.45% and is withheld from each employee’s pay. The employer tax is 2.9%. “There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax” (IRS.gov, “Publication 15”, 8/29/2013).

The IRS requires employers to withhold an additional amount for Medicare from an employee’s wages. For example, employers must withhold an additional 0.9% Medicare tax from employees whose wages exceed $200,000 in a calendar year. Employers are required to pay the tax in the same period that they pay an employee in excess of $200,000. The employer must continue to maintain each pay period through the end of the year. Although the employer is required to “share” the other taxes, there is no share in the Additional Medicare Tax. Special rules apply for types of services and payments. See Section 15 of Publication 15 for more information on classes of employment and special types of payments and treatment under employment taxes.

Employers must report and pay federal unemployment tax (FUTA) separately from federal income tax, social security, and Medicare taxes. Employers pay FUTA from their own funds. Employees are not responsible for paying this tax; and employers cannot withhold the tax from the employee’s wages. Publications 15 and 15-A provide guidance and more information on FUTA tax.

Finally, the self-employment tax is a type of Social Security and Medicare tax aimed primarily at those who are self-employed. The self-employment tax is similar to Social Security and Medicare taxes, which are withheld from many employees’ pay. The self-employment tax is appropriate for individuals whose net earnings from self-employment are a minimum of $400 and for church income of $108.28 or more. Self-employed individuals calculate self-employment tax using Schedule SE (Form 1040). The current self-employment tax rate for 2013 is 15.3%. The rate is divided into two parts: 12.4% for Social Security and 2.9% for Medicare (hospital insurance).

After this computation, self-employed taxpayers may opt for a fiscal year other than the calendar year. If they choose the former, then they must use the tax rate and maximum earnings limit that is in effect at the beginning of the tax year. “Even if the tax rate or income ceiling changes during [a] fiscal year, [they must] continue to use the same rate and limit throughout [their] tax year” (IRS.gov, “Self-Employment Tax,” 8/29/2013).

Employers and small business taxpayers can visit the IRS website for more guidance on their state’s specific requirements and the taxes they must pay.