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What are Employment Taxes?
Employment taxes, also referred to as payroll taxes or Form 941 taxes and Form 940 taxes, are often the largest tax liability an employer faces. Employment taxes include the following taxes:
Regardless of whether an employer is a corporation, a limited liability company, a partnership, a non-profit, or an individual, every employer is required to collect, deposit and report employment taxes. Employers report federal income tax withholding (FITW) and Social Security and Medicare taxes (FICA) to the IRS on Form 941. Employers report federal unemployment taxes (FUTA) to the IRS on Form 940.
Employers must withhold federal income tax from their employees’ wages, and deposit the withheld income tax with the Treasury. The amount an employer must withhold is determined based on Form W-4 that the employee fills out.
Taxes under the Federal Insurance Contributions Act (FICA) are composed of the old-age, survivors, and disability insurance taxes (OASDI), also known as Social Security taxes, and the hospital insurance tax, also known as Medicare taxes (Med). These taxes apply to both employers and employees.
Social Security Tax (OASDI)
The official name for Social Security tax is old age, survivor and disability insurance (OASDI). Under federal law, employers are required to withhold 6.2 percent of an employee’s wages (subject to a wage ceiling that fluctuates each year) as the employee’s Social Security contribution, and deposit this amount with the Treasury. Employers are also required to pay a matching amount, out of the employer’s own funds, as the employer’s matching Social Security contribution.
Medicare Tax (Med)
Under federal law, employers are required to withhold 1.45 percent of an employee’s wages as the employee’s Medicare contribution, and deposit this amount with the Treasury. If the employee’s Medicare wages exceeds a certain limit, Additional Medicare Tax of 0.9 percent applies to the employee’s wages that exceed that limit and must be withheld by the employer. Employers are responsible for also making Medicare contributions, which are paid out of employers’ own funds, equal to 1.45 percent of the Medicare wages paid to the employers’ employees.
FUTA (Federal Unemployment Tax Act) tax is a payroll or employment tax paid solely by an employer. The amount an employer must pay each year is based on the amount of each of its employees’ wages or salary. Generally, federal unemployment tax (FUTA) ends up being 0.6 percent of the first $7,000 of each employee’s wages or salary per year.
Employment Tax Issues
Every employer has an obligation to follow tax law and regulations governing a wide variety of issues, many of which are unique to employers. Although the collection, payment, and reporting of employment taxes may appear simple, many employers find themselves in over their heads when it comes to understanding and meeting employment tax deadlines. In addition, employers who attempt to comply with their employment tax obligations may encounter any number of issues, including issues with the following:
Almost every move an employer makes has tax implications. Therefore, it is critical for businesses and employers faced with employment taxes to understand their employment tax reporting and payment obligations, and to have the proper processes and controls in place to manage employment tax reporting and compliance.
The employment tax attorneys at the Politte Law Offices work with individuals, C corporations, S corporations, limited liability companies, partnerships, non-profits, and other organizations, giving them advice throughout the life cycle of their businesses. We help employers navigate increasingly complex federal and state employment tax laws and regulations, advising them every step of the way.
We put our attorneys’ knowledge of and experience with employment taxes and associated issues to work for our clients by advising them as to employment tax matters and their employment tax obligations, assisting them in making business decisions that are in their best interests, and representing them before the IRS and state taxing authorities when they are faced with tax audits, tax assessments, tax appeals, tax collections, or tax litigation.
Contact the employment tax attorneys at the Politte Law Offices today.
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