Employment Tax Basics for Small Business Owners

As an employer, in addition to paying your employees salaries, you are also responsible for withholding certain taxes from their gross salary, matching some of the taxes withheld, and paying other taxes from your own funds. To comply with the IRS and state laws, you must then report and deposit these taxes on certain forms and, on, or before certain due dates.

Here is a list of federal and state employment taxes:

Federal Employment Taxes

  • Federal Income Tax: Employers generally must withhold federal income tax from employees’ wages. Use the employee’s Form W-4 and withholding tables to figure out the withholding amount. You must deposit your withholdings; the requirements for depositing vary based on your business and the amount you withhold.
  • Social Security and Medicare Taxes: Social security and Medicare taxes are also known as FICA taxes. Employers generally must withhold a part of social security and Medicare taxes from employees’ wages and pay a matching amount themselves. Use the employee’s Form W-4 to figure out how much FICA taxes to withhold. You must deposit the FICA taxes you withhold. For 2016, the employee tax rate for social security was 6.2%. The social security wage base limit is $118,500. The employee tax rate for Medicare is 1.45%.
  • Additional Medicare Tax: Beginning January 1, 2013, employers are responsible for withholding 0.9% Additional Medicare Tax on an employee’s wages and compensation that exceed a threshold amount, based on the employee’s filing status. You are required to begin withholding Additional Medicare Tax in the pay period in which it pays wages and compensation in excess of the threshold amount to an employee. There is no employer match for the Additional Medicare Tax.
  • Federal Unemployment (FUTA) Tax: Employers report and pay FUTA tax separately from Federal Income tax, and social security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.
  • Self-Employment Tax: Self-Employment tax (SE tax) is a social security and Medicare tax (aka FICA taxes) primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most employees.

State Employment Taxes

  • State Income Tax: Employers generally must withhold state income tax from employees’ wages. Use the employee’s Form W-4, or state-equivalent of Form W-4, and withholding tables, to figure out the withholding amount. You must deposit your withholdings; the requirements for depositing vary based on your business and the amount you withhold.
  • State Unemployment (SUTA) Tax: Employers report and pay SUTA tax separately from State Income tax. You pay SUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

Employers must deposit and report employment taxes on specific forms and, on, or before certain due dates. At the end of the year, you must prepare and file Form W-2 to report wages, tips, and other compensation paid to an employee. Use Form W-3 to transmit Form W-2 to the Social Security Administration.

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