Understanding employment taxes

Employers must deposit and report federal employment taxes. Some of these taxes are paid by both the employer and the employee, while others are paid by the employer. Examples include federal income tax, Social Security tax, Medicare tax and federal unemployment tax.

Federal income tax

Employers generally must withhold federal income tax from employees' wages. To figure out how much tax to withhold, use the employee's Form W-4, Employee’s Withholding Certificate, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods.

Employers may want their employees to use the Tax Withholding Estimator tool to estimate the federal income tax they want their employer to withhold from their paycheck.

Social Security and Medicare taxes

Employers generally must withhold Social Security and Medicare taxes from employees' wages and pay the employer share of these taxes.

Social security and Medicare taxes have different rates and only the Social Security tax has a wage base limit. The wage base limit is the maximum wage subject to the tax for the year. Determine the amount of withholding for Social Security and Medicare taxes by multiplying each payment by the employee tax rate.

For the current year social security wage base limit and Social Security and Medicare tax rates refer to Publication 15, (Circular E), Employer's Tax Guide.

Additional Medicare tax

In addition, employers are responsible for withholding the 0.9% Additional Medicare tax on an employee's wages and compensation that exceeds $200,000 in a calendar year. You must begin withholding Additional Medicare tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There is no employer match for the Additional Medicare tax.

For additional information see our questions and answers for Additional Medicare Tax and Publication 15.

Federal unemployment (FUTA) tax

Employer’s 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. Refer to Publication 15 and Publication 15-A, Employer's Supplemental Tax Guide for more information on FUTA tax.

Reporting employment taxes

Generally, employers must report wages, tips and other compensation paid to an employee by filing the required employment tax returns to the IRS. You must report employment taxes by filing one or more of the following tax returns:

• Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return,
• Form 941, Employer's Quarterly Federal Tax Return,
• Form 943, Employer's Annual Federal Tax Return for Agricultural Employees,
• Form 944, Employer’s Annual Federal Tax Return, and
• Form 945, Annual Return of Withheld Federal Income Tax.

You must file employment tax returns by set deadlines. In most cases, you can e-file employment tax returns.

At the end of the year, you must prepare and file Form W-2, Wage and Tax Statement to report wages, tips and other compensation (including noncash payments) paid to each employee in your trade or business. Use Form W-3, Transmittal of Wage and Tax Statements to transmit Forms W-2 to the Social Security Administration. You must provide a copy of Form W-2 to your employees so they can accurately report the wages you paid to them.

Depositing employment taxes

In general, you must deposit federal income tax withheld as well as the employer and employee Social Security and Medicare taxes and FUTA taxes. The requirements for depositing, as explained in Publication 15, vary based on your business and the amount you withhold.

Federal tax deposits must be made by electronic funds transfers (EFT).

You can make payments through your business tax account, through Direct Pay for businesses, using the government's free Electronic Federal Tax Payment System (EFTPS) or through one of the following methods that may charge a fee:

• Ask your financial institution to initiate an automated clearing house (ACH) credit payment on your behalf.
• Ask a trusted third party, such as a tax professional or payroll service, to make the payment for you.
• Ask your financial institution to make a same-day tax wire payment for you.

Self-employment tax

Self-Employment Tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most employees.