Posted by Fred Lake

Exploring Various Types of Employment Taxes

Exploring Various Types of Employment Taxes

All employers are expected to pay their taxes and send in taxes from their employees' wages. Employment taxes come in various types, and the employer will have to withhold, file a form with the IRS on behalf of the workers as payroll taxes, and contribute some personally as well. 


Explaining Employment Taxes 

The IRS's employment tax is taxes that must be paid by the employer, the business, and their employee to the IRS. Another employment tax is self-employment taxes that consist of Medicare and Social Security tax. 

For each tax, the source of the money differs:

  • State and federal withholding is taken from the employee's pay and sent to the taxing authority.

  • Federal Insurance Contribution Act will be paid both by the employee and the employer.

  • The employer, not the employee, will pay worker's compensation and unemployment taxes. 

Withholding taxes is not necessary for people that work with freelancers. However, they must collect Form W 9 from the gig worker and send Form 1099 NEC to them and Uncle Sam, which reports the worker's amount if it is above $600. 


Trust Fund Taxes 

When employers hold taxes from their worker's pay, the money is sent to a fund before Uncle Sam collects it. While the employer does not own the trust fund taxes, they manage it. As a result, the employer can be penalized severely for using such funds for anything besides tax payments. 

Also, not sending in the trust fund comes with penalties, which might trigger a tax lien if one does not pay the penalty.


Federal Income Tax Withholding 

All employers must remove the federal income tax from their employees. This tax value can be determined using Form W 4 that the employee filed at the point of hire. Employees without W4 on record cannot be paid. 

The income tax withholding at the federal level is calculated using the pay period for every employer. In estimating the federal income tax withholding for each employer, one needs the gross pay for the period and the W4 information. 


State Income Tax Withholding 

Many states also collect their income tax, which means employers have to withhold this from their workers. A couple of states do not have an income tax, while some don't collect employment tax, but collect tax on other income types.

An employer needs to register with the state's taxing authority to send the taxes withheld from the employer to the state. There are procedures for each state on calculating and sending in the income tax withheld. 


Medicaid and Social Security (FICA Taxes)

It is compulsory for all employers in the US to deduct FICA taxes from their employee's paychecks and send both their portion and their employee's part to Uncle Sam.

The Social Security tax is placed at 6.2% for both employee and employer, making it 12.4%. In 2021, the maximum wage subjected to this tax value is $142,800. 

The Medicare tax is 1.45% each for employee and employer and comes without a maximum wage. This gives a total tax of 2.9%

Besides the FICA taxes, employers must also withhold the Additional Medicare Tax if the employee's total income is more than $200,000 every year. This tax is 0.9% of the worker’s gross income. This means that an employee with income above $200,000 must pay 2.35% for Medicare for each pay period of the year.


Self Employment Taxes

Self-employment taxes (SECA Taxes) are the Medicare and Social Security tax for self-employed people, the same way FICA is for employed people. Also, there is an additional Medicare Tax if their income exceeds the $200,000 annual threshold. 

SECA taxes are different because they are neither withheld from the worker's pay nor remitted by the employer. The tax is paid on the owner's personal return and calculated using the business's net income. 

This tax rate is set at 12.4% for SS, and 2.9% for Medicare, giving a total of 15.3%

For individual filers with an annual self-employment income above $200,000 for the individual filer or above $250,000 for married filing jointly, one will pay the Additional Medicare Tax of 0.9%.

Even though the burden of paying the employer and employee portion of the taxpayer's tax lies on the self-employed individual, Uncle Sam offers a tax break – one can deduct the employer portion of the self-employment tax from the tax return. Schedule SE can help with this calculation.


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Fred Lake
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