Most of the employment taxes your business pays fit under the "payroll" category, although self-employment tax is closely related. In a sense, federal and local governments have asked you to be the tax collector, since you are required to withhold a number of taxes-income, Social Security, Medicare and unemployment, among others. It is vital to stay timely with your payments to the tax authorities, as penalties for delayed payment are steep.
What is a W-4?
Every employee that you hire will be asked to fill out a W-4 form, which helps calculate the amount of income tax your business will withhold. Geared to meet an employee's personal income tax obligation, the form includes the employee's marital status and how many exemptions he or she expects to claim. Using the frequency of the payroll period and the individual's wages, the IRS provides charts and other ways to calculate the appropriate amount to be withheld.
All but a handful of states and even a few cities have imposed their own income tax, and you will be responsible for withholding an appropriate amount for those taxes as well.
How much of my employees' Social Security and Medicare do I have to pay?
Social Security and Medicare taxes are shared equally by the employer and the employee. Unlike income tax, these taxes are calculated as a flat percent of wages. The Social Security portion has a ceiling of $90,000; there is no ceiling for Medicare.
The rate for Social Security is 6.2 percent of wages and for Medicare is 1.45 percent. This totals 7.65 percent; the employer pays 7.65 percent of total wages and withholds the employee's contribution of an additional 7.65 percent of wages.
In what situation will I need to pay unemployment tax?
You are responsible for a federal unemployment tax (FUTA) based on total wages you pay employees. This is not a withholding situation; the business pays the tax directly.
You will be liable for FUTA if you pay wages totaling $1,500 or more in a quarter, or if you have at least one employee during 20 "calendar weeks" in 1 year.
Currently, the tax is a flat rate of 6.2 percent on the first $7,000 that you pay each employee.
Do I not have to pay state unemployment insurance taxes too?
Yes, state unemployment insurance taxes fund programs for unemployed workers. Paying a state unemployment insurance tax may mean you can claim credits against the federal unemployment tax.
I am self-employed. What kind of employment taxes do I have to pay?
If you do not incorporate the business and thus do not pay yourself as an employee, you have a special situation where you pay your own self-employment taxes. This process parallels paying employees with some exceptions.
First, you will not have income taxes withheld as an employee would. Instead you may need to make estimated tax payments to the IRS each quarter. Also, you effectively pay your own Social Security and Medicare taxes at the rate of 15.3 percent. You do not have an employer to pick up half the tab for this. Schedule SE is where you report your net self-employment income for Form 1040.