If you currently have employees to help you operate your business or plan on hiring your first employees soon, it’s vital you understand how employment tax works. While your employees undoubtedly already know some of their wages will be withheld, you should still know why those wages are withheld in the first place. You’ll be better informed as a business owner, and you can share this knowledge with your employees in order for them to better understand how employment taxes work.
Federal Income Tax Withholding
Part of your employees’ wages will be withheld for federal income taxes. The specific amount withheld for this category depends on the employee’s marital status, the number of withholding allowances for which the employee qualifies and the overall amount the employee makes every pay period. Calculate federal income tax withholdings by having employees fill out W-4 forms, also known as Employee’s Withholding Allowance Certificates. Be sure your staff keeps you well informed of major changes in their lives, such as getting married or having a child. Such changes might necessitate a new form.
Medicare and Social Security Tax
A portion of your team’s wages will also be withheld to cover Social Security and Medicare taxes. What’s more is that you as an employer have to meet employee contributions.
Federal Unemployment Tax
A percentage of employee wages are also set aside to help an individual in the event that he or she ever becomes unemployed. Something to bear in mind is that businesses classified as sole proprietorships or partnerships are not legally obligated to pay federal unemployment tax on an owner’s compensation. This “advantage” is balanced out by the fact that partnerships and sole proprietorships often lack legal protection from personal liability.
State Employment Tax
If you and your employees thought enough taxes were being withheld from employee paychecks, think again. So far, taxes have been taken care of at the federal level, but not at the state level. Specific state taxes to deduct from an employee’s paycheck vary from state to state and might cover items such as State Disability Insurance or state income tax. Check with your state to see how much you need to withhold for state tax purposes. You should also check these state laws at least once a year to make sure they haven’t changed. You may need to withhold more or less in the coming years.
Not only do business owners have to make sure enough taxes are withheld from employee wages, they have to deposit those deductions as well. Depending on where you live, you’ll have to make a deposit every year, every quarter or every month. The only taxes for which you need to make regular deposits include withheld income, Medicare and Social Security. Failing to make payments as you should could result in sizable penalties, so make sure you remain compliant throughout the year and that you’re aware of the latest requirements.
Those who work as independent contractors or freelancers also need to make sure they pay employment taxes and that they do so the right way. While individuals and companies that employ these individuals don’t have to withhold earnings for them, they do need to make sure they have contractors and freelancers fill out W-9 forms and send them 1099 forms at the end of the year with their total annual earnings.
If you yourself are a freelancer or an independent contractor, be sure you pay your taxes every quarter, otherwise the IRS is likely to penalize you. Make things easier by creating a savings account in which you deduct a percentage of your earnings.
Seek out the services of an experienced and trusted accountant or business attorney for more information regarding employment taxes and withholding. Not being aware of the law might not serve as a defense if you’re penalized.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.