Employers are responsible for depositing and reporting employment 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, which include 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 calculate how much they are to withhold from an employee’s wage, employers must refer to two things: the employee’s Form W-4 and the withholding tables, which are housed in Publication 15, Employer’s Tax Guide. Employers must deposit withholdings. There are two deposit schedules-monthly and semiweekly. The schedules determine when an employer must deposit Social Security, Medicare, and withheld income taxes. “These schedules tell you when a deposit is due after a tax liability arises” (IRS.gov, “Publication 15,” 8/29/2013). The deposit schedule an employer uses is based upon the total tax liability reported on Form 941. With this in mind, the deposit is not based upon how often the employer pays its employees.
When it comes to Social Security and Medicare taxes, employers must withhold a part of the employee’s wage and match the amount as well. Employers refer to Publication 15 and Publication 15-A, Employer’s Supplemental Tax Guide for instruction on how much to withhold from the employee’s wages. Employers are required to deposit the amounts they withhold. As of this writing, “for 2013, the employee tax rate for social security increased to 6.2%. The social security wage base limit increased to $113,700” (IRS.gov, “Understanding Employment Taxes,” 8/29/2013). The employee tax rate for Medicare is 1.45% to be withheld from each employee’s wages. 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 a 0.9% Additional Medicare Tax from employees whose wages exceed $200,000 in a calendar year. Employers are required to pay the tax in the same period in which it pays 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 of the Additional Medicare Tax. Special rules apply for types of services and payments. See Section 15 of Publication 15 for more information about 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 the tax from the employee’s wages. Publications 15 and 15-A provide guidance on and more information about the FUTA tax.
Lastly, the self-employment tax is a type of Social Security and Medicare tax primarily geared towards those individuals who work for themselves. The self-employment tax is similar to Social Security and Medicare taxes, which are withheld from the pay of many employees. The self-employment tax is appropriate for individuals whose net earnings from self-employment are a minimum of $400 and for church income of $108.28 or more. Self-employed individuals calculate the 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 calculation, self-employed taxpayers may choose a tax 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 maximum earnings limit changes during [a] tax 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 may visit the IRS website for more guidance on the requirements specific to their status and the taxes they must pay.