Employment Tax Resolution

What is Payroll Tax?

Employment taxes are taxes individuals, businesses and any of their employees are expected to pay to federal, state, and local agencies. Employers refer to this as a “payroll tax”. There are a number of different types of taxes withheld from employees by their employers. Similar taxes are paid and deposited with the appropriate tax agencies by those individuals who are self-employed. Self-employed business owners must pay self-employment which includes the Social Security and Medicare taxes. If the IRS believes any individual or business has not paid these taxes, they are liable for penalties.

Types of Payroll Taxes

Income tax must be withheld from employees’ paychecks. Employees are able to adjust the amount of their tax withheld by filing IRS Form W-4 designating the number of withholding allowances they want to claim. It is  advisable to come close to their overall tax liability at the end of the year. If done correctly, employees can avoid owing huge amounts of money in taxes when it comes to filing their yearly tax return. There are a number of different types of taxes that should be withheld from employees’ paychecks and then immediately deposited to the IRS after payroll including:

FICA covers two tax programs: Social Security and Medicare. This tax rate does not change but it may be more or less depending on an employees' overall earnings during a given year.

This tax is paid only by the employer. It is calculated at the rate of 6% for the first $7,000 paid to an employee. It is not paid on amounts earned thereafter. Different states have their own unemployment tax programs for employers.

This is a federal-state program financed through federal and state employer taxes. The federal side of the program is called FUTA. The unemployment tax differs from state to state. The program is based on experience-ratings. That means that employees working for firms that lay off a higher percentage of their employees within a state can  collect a greater amount of unemployment benefits. The firms themselves pay much higher tax rates than businesses that lay off fewer workers.

Cities may impose a payroll tax that is usually paid by both employee and employer and can vary in range.

Employers must pay into state-run funds that provide benefits for workers who get injured on the job or sick because of their work. The benefits are governed by state workers compensation laws and are paid by employer contributions to workers compensation funds.

Sometimes called SECA taxes, Self-Employment Taxes are similar to FICA taxes in that they cover Social Security and Medicare taxes for those who are self-employed along with retirement benefits, survivor benefits, disability benefits and hospital insurance (Medicare) benefits. If an individual earns over $200,000, an additional Medicare tax is required. The tax is determined by the individual's net income. The rate is 12.4% for Social Security plus 2.9% for Medicare, totaling 15.3%. The base limit is $137,700 for 2020 and $142,800 for 2021. If an individual earns more than $200,000, he/she will have to pay an additional tax of 0.9% for Medicare. Since the self-employed individual pays both shares of this tax (individual and employer), the employer amount is calculated as a business expense.

Is it illegal to withhold payroll taxes from the IRS?

Employers are required to withhold taxes for their employees and deposit these taxes into an authorized bank or financial institution. Businesses are also responsible for filing the FUTA (The Federal Unemployment Tax Act) return annually. Unfortunately, any employer who does not comply with employment tax laws may be subject to criminal and civil sanctions if they are willfully failing to pay employment taxes. This could also lead to heavy penalties, so it is important for any business to calculate the amount of payroll taxes owed and to pay them on time. It is the responsibility of both the employer and the employee to ensure taxes are being taken out correctly as the employee could also be liable for paying additional taxes after filing their tax return in the event they did not fill out their W-4 correctly.

 

It is typical for any business to withhold from their employees’ wages for tax purposes although this is not always the case. Some businesses hire their employees as independent contractors and therefore are not required to withhold taxes. Independent contractors are responsible for paying their own taxes and should receive 1099 forms from their employers. If the independent contractor earns less than $600, they will not receive a 1099 but will still have to report the amount earned to the IRS.
Examples of an Independent Contractor include those who work as/for the following:

Next Steps:

Responsibility and accounting are very important regarding Employment tax laws. Whether you are self-employed, employed by an organization or a business owner yourself, taxes are going to be something you are obligated to file. Luckily, we are here to help with some of that responsibility and accountability. Contact us today and see how we can help you with your employment tax situation. Check our IRS tax resolution services page for more information.

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