What is Employment Tax? Do You Need to Pay It?

As a business owner, you’re responsible for different types of business taxes, including employment tax. Now, you may be wondering what that is and whether it applies to your business.

If your business has employees, whether full-time, part-time, or temporary, you have to submit taxes on behalf of those employees to the Internal Revenue Service (IRS). Additionally, it is crucial that you pay these mandatory taxes correctly and on time to avoid being hit with significant penalties. 

While you may feel overwhelmed managing these tax-related issues, we can help you navigate through your tax obligations so that you can run your business confidently. Here, you will learn the basics of employment taxes and what you need to do to keep your business compliant with the IRS. 

What Is Employment Tax?

You may know about the different taxes taken out of your wages, salary, or tips every pay cycle if you’ve ever held a job. Those taxes combined with the taxes employers must pay are what the IRS refers to as employment taxes.

In other words, when you employ others to work for your business, you are the one withholding part of their compensation every pay period and combining it with your contribution to deposit directly to the IRS. By remitting this payment, you’re covering employment taxes on your employees’ behalf.    

Specifically, employment taxes consist of:

To help you understand what these taxes mean regarding your responsibilities as a business owner, here’s a breakdown of each component.

Federal income tax

Payment is based on a percentage of an employee’s taxable income, and the information provided by the employee on their Form W-4 determines that percentage. With income tax, you’re simply responsible for withholding the correct amount of money from your employee’s pay and submitting it to the federal government. Please note that some states collect income tax as well.  

Federal Insurance Contribution Act (FICA) taxes 

With FICA, you’re splitting the payment 50-50 with your employee. Therefore, you’re obligated to withhold half and pay your half of FICA taxes to the government to cover programs like Medicare and Social Security.

Federal Unemployment Tax Act (FUTA) taxes

Employers are solely responsible for paying FUTA taxes by calculating a set percentage of taxable income for each employee. These taxes benefit individuals experiencing job loss due to a recent layoff or termination. 

Additional Medicare Tax

This tax is exclusive to those employees whose compensation exceeds $200,000, and they alone are responsible for covering it. Your job is to withhold earnings, using a percentage of their taxable income, and remit payments to the IRS.

What Are Your Employment Tax Obligations?

As an employer, the IRS expects you to pay and account for employment taxes to the federal and, in some cases, state and local governments. You are required to deposit your employees’ withholdings and your company’s contributions into the Electronic Federal Tax Payment System (EFTPS). Also, you must submit W-2 and 1099 reports to all your employees and contractors to inform them of the withholding amounts and compensation paid on their behalf. 

Even if your company operates without employees, once your business is incorporated, you become the company’s sole employee. Therefore, the checks you pay yourself are deemed taxable and should be handled accordingly. 

When do you pay and report taxes?

For businesses with no employees and that aren’t incorporated, your compensation is considered self-employment income. You are then responsible for paying estimated taxes on that income each quarter. 

All other businesses must deposit employee withholdings and employer contributions to the IRS either monthly or semi-weekly, depending on the company’s size. Use IRS Publication 15 to locate your specific deposit schedule and tax deadlines, so you can adequately plan your tax payments and reporting. 

Additionally, employers are expected to file Form 941 quarterly and Forms 940, 945, and W-2 annually. Last, check with your state and local government agencies to verify whether you have to deposit withholdings and file reports or tax forms, like on the federal level.  

To ensure you fulfill all of your employment tax responsibilities, use the following checklist as a guide: 

  1. Review your federal taxes and state and local taxes, if applicable, to stay up-to-date on tax regulations relevant to your business.
  2. Distinguish among your employees all taxable workers and taxable wages.
  3. Verify you’re collecting enough in payroll taxes and distribute the correct amount to the appropriate tax agencies.
  4. Maintain accurate federal and state records.
  5. Complete and file the required forms, such as Forms 941, 943, 944, 945, and 940, on paper or electronically to report income and amounts withheld and paid.

These steps should help you stay on track with all tax-related tasks, so you never miss a deadline. 

How to Avoid Tax Penalties

Employment tax responsibilities may seem stressful mainly because the rules can be complicated and are constantly changing. And if you don’t stay on top of them and miss or even delay a payment, you risk late fees and harsh penalties.

To avoid all of that, consider outsourcing the management of your payroll tax duties to a tax professional. Having a tax expert in your corner can make performing even the most complex tasks a breeze. Not to mention, you’ll ensure your company complies with all IRS regulations for businesses.

You can also contact us for guidance on tax planning, tax resolution, and bookkeeping. Or download our free e-book for helpful tax planning tips and information on how to prepare yourself for next year’s taxes.