Employers are responsible for depositing and reporting employment taxes. At the end of the year, the employer must prepare a Form W-2. The purpose of this form is to report wages, tips, and other compensation paid to an employee. Employers must also use Form W-3. This form is used to send data on Form W-2 to the Social Security Administration.
Employers must withhold different categories for the IRS, which include federal income, Social Security and Medicare, supplemental Medicare, Federal Unemployment (FUTA), and self-employment taxes.
Federal income taxes are generally deducted from an employee’s salary. To calculate how much they should withhold from an employee’s paycheck, employers must refer to two things: the employee’s Form W-4 and the withholding table, which is in Publication 15, Company Tax Guide. Employers must deposit deductions. There are two deposit schedules-monthly and semi-weekly. The schedule determines when the employer must deposit Social Security, Medicare, and withholding income taxes. “This schedule tells you when the deposit is due after the tax liability arises” (IRS.gov, “Publication 15,” 8/29/2013). The deposit schedule that employers use is based on the total tax liability reported on Form 941. With this in mind, deposits are not based on how often the employer pays its employees.
When it comes to Social Security and Medicare taxes, employers have to withhold a portion of the employee’s wages and match the amount as well. Employers refer to Publication 15 and Publication 15-A, Employer’s Supplemental Tax Guide for instructions on how much to withhold from employee wages. Employers are required to deposit the amount they deduct. As of this writing, “for 2013, the employee tax rate for social security was increased to 6.2%. The social security wage threshold was increased to $113,700” (IRS.gov, “Understanding Employment Taxes,” 8/29/2013). The employee tax rate for Medicare is 1.45% deducted from each employee’s paycheck. The tax for employers is 2.9%. “There is no wage baseline for Medicare taxes; all wages covered are subject to Medicare taxes” (IRS.gov, “Publication 15,” 8/29/2013).
The IRS requires employers to withhold additional Medicare amounts from employee wages. For example, an employer must withhold 0.9% Additional Medicare Tax from employees whose wages exceed $200,000 in a calendar year. The employer is required to pay taxes in the same period in which it pays the employee more than $200,000. The employer must continue to withhold each pay period until the end of the year. Although employers are required to “split” other taxes, it is not part of the Additional Medicare Tax. Specific rules apply to types of services and payments. See Section 15 of Publication 15 for more information on classes of work and special types of pay and treatment under employment taxes.
Employers must report and pay Federal Unemployment tax (FUTA) separately from federal income taxes, social security, and Medicare taxes. Entrepreneurs pay FUTA from their own funds. Employees are not responsible for paying this tax; and employers cannot withhold taxes from workers’ wages. Publications 15 and 15-A provide guidance and further information on FUTA taxes.
Lastly, self-employment tax is a type of Social Security and Medicare tax that is primarily aimed at people who work for themselves. Self-employment taxes are similar to Social Security and Medicare taxes, which are deducted from the salaries of many employees. The self-employment tax is appropriate for individuals whose net income from self-employment is at least $400 and for church incomes of $108.28 or more. Individual entrepreneurs calculate self-employment tax using Schedule SE (Form 1040). The current self-employment tax rate for 2013 is 15.3%. This rate is divided into two parts: 12.4% for Social Security and 2.9% for Medicare (hospital insurance).
After this calculation, self-employed taxpayers can choose a tax year other than the calendar year. If they choose the former, then they must use the tax rate and maximum income limit in effect at the start of the tax year. “Even if the tax rate or maximum income limit changes during [a] tax year, [they must] continue to use the same rates and limits across [their] tax year” (IRS.gov, “Employee Tax,” 8/29/2013).
Entrepreneurs and small business taxpayers can visit the IRS website for further guidance on the specific requirements for their status and the taxes they must pay.