Employers are responsible for depositing and reporting payroll 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 Form W-3. 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 figure out how much to withhold from an employee’s wages, employers should look at two things: the employee’s Form W-4 and the withholding tables, found in Publication 15, Employer’s Tax Guide. The employers must deposit the retentions. There are two deposit schedules: monthly and bi-weekly. Schedules determine when an employer must deposit Social Security, Medicare, and income taxes withheld. “These schedules tell you when a deposit is due after a tax liability arises” (IRS.gov, “Publication 15,” 8/29/2013). The deposit schedule used by an employer 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 an employee’s wages. Employers are required to deposit the amounts they withhold. At the time of this writing, “For 2013, the employee tax rate for Social Security increased to 6.2%. The Social Security salary base limit increased to $113,700” (IRS.gov, “Understanding taxes on employment”, 29/8/2013). The employee tax rate for Medicare is 1.45% and is withheld from each employee’s salary. The tax for the employer 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 Medicare amount 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 they pay an employee in excess of $200,000. The employer must continue to withhold each pay period until 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 (FUTA) tax 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 tax from the employee’s wages. Publications 15 and 15-A provide guidance and more information on the FUTA tax.
Finally, the self-employment tax is a type of Social Security and Medicare tax directed primarily at those who are self-employed. Self-employment tax is similar to Social Security and Medicare taxes, which are withheld from pay for many employees. The self-employment tax is appropriate for individuals whose net earnings from self-employment are at least $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 choose 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 the maximum income limit 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-specific requirements and the taxes they must pay.