If you own a business, then you as the business owner are responsible for withholding from your employees’ wages certain taxes that must be paid to the Internal Revenue Service (IRS). This withholding is known as employment taxes or payroll taxes.
The employment taxes you as an employer must withhold include the following:
Income tax is the primary category of tax money paid to the IRS to fund the government and it can include components for federal, state, and local taxes depending on the jurisdiction where the employee works.
Although the employer is responsible for withholding income tax and paying that money to the IRS, the withheld income tax amount is simply an estimate of the income tax owed for each employee. The amount of withholding by the employer is based on the IRS Form W-4 completed by the employee. It is the responsibility of the employee to calculate their actual income taxes at the end of the year and to pay any additional tax owed.
Social Security tax, which is also known as tax from the Federal Insurance Contributions Act (FICA), is used to fund the Old-Age Survivors, and Disability Insurance (OASDI) program for the purpose of paying benefits to people at retirement age. The employer and the employee pay Social Security tax equally
Medicare tax is related to the funding of a health benefit program primarily for people over the age of 65. As with Social Security tax, the employer and the employee also pay Medicare tax equally.
Unemployment tax refers to money withheld to fund unemployment insurance, which pays money to those who are out of work. Unemployment tax is established by the Federal Unemployment Tax Act (FUTA).
Employers are responsible for reporting employment taxes to the appropriate governmental agencies usually on a quarterly basis as well as annually at the federal level. Employers must report employment taxes to the IRS through the Electronic Federal Tax Payment System (EFTPS).
Employers are also required to provide a summary of employment taxes to each employee at the end of the tax year in the form of IRS Form W-2.
If an employer does not report the withholding of employment taxes to the appropriate agencies at the appropriate times or provide IRS Form W-2 to each employee by the deadline, the employer is subject to various penalties at both the federal and state levels. The amount of the penalty varies by the jurisdiction, but the penalty may be as high as 20% of the amount not reported.
Failure to pay payroll taxes is a serious legal matter and can result in the business owner being personally liable for the unpaid tax amounts. Therefore, If you have questions about the withholding of payroll taxes, have received a notice from the IRS indicating they have questions about your payroll taxes, or you believe you may have performed an action related to payroll taxes that is illegal, you should contact a criminal defense attorney immediately. A criminal defense attorney can evaluate your specific situation and determine the best next steps to address whatever questions or issues you have related to payroll taxes.
- Self Employed Individual and Income Tax (taxlawhome.com)
- Federal income tax significant events, Part 3 – Job Change (taxlawhome.com)
- What is an IRS wage levy? How much of my wages can the IRS take? (taxlawhome.com)
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.