Federal law requires most employers to withhold federal taxes from their employees’ wages. Whether you’re a small business owner who is just starting or one who has been in business for a while – ready to hire an employee or two – here is what you should know about withholding, reporting, and paying employment taxes.
Federal Income Tax
Small businesses first need to figure out how much tax to withhold. Small business employers can better understand the process by starting with an employee’s Form W-4 and the withholding tables described in Publication 15, Employer’s Tax Guide.
Social Security and Medicare Taxes
Most employers also withhold social security and Medicare taxes from employees’ wages and deposit them along with the employers’ matching share. In 2013, employers became responsible for withholding the Additional Medicare Tax on wages that exceed a threshold amount. There is no employer match for the Additional Medicare Tax, and certain types of wages and compensation are not subject to withholding.
Federal Unemployment (FUTA) Tax
Employers report and pay FUTA tax separately from other taxes. Employees do not pay this tax or have it withheld from their pay. Businesses pay FUTA taxes from their own funds.
Depositing Employment Taxes
Generally, employers pay employment taxes by making federal tax deposits through the Electronic Federal Tax Payment System (EFTPS). The amount of taxes withheld during a prior one-year period determines when to make the deposits. Publication 3151-A, The ABCs of FTDs: Resource Guide for Understanding Federal Tax Deposits and the IRS Tax Calendar for Businesses and Self-Employed are helpful tools.
Failure to make a timely deposit can mean being subject to a failure-to-deposit penalty of up to 15 percent. But the penalty can be waived if an employer has a history of filing required returns and making tax payments on time. Penalty relief is available, however.
Reporting Employment Taxes
Generally, employers report wages and compensation paid to an employee by filing the required forms with the IRS. E-filing Forms 940, 941, 943, 944, and 945 is an easy, secure, and accurate way to file employment tax forms. Employers filing quarterly tax returns with an estimated total of $1,000 or less for the calendar year may now request to file Form 944, Employer’s ANNUAL Federal Tax Return once a year instead. At the end of the year, the employer must provide employees with Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation. Small businesses file Forms W-2 and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration and, if required, state or local tax departments.
Save Time – File Payroll Taxes Electronically
Running a business with employees can be hard work. Business owners can make things a little easier on themselves by filing payroll and employment taxes electronically. Not only does it save time, but it is also secure and accurate, and the filer receives an email to confirm the IRS received the form within 24 hours.
While the easiest way to file payroll and employment taxes is to have your tax professional file the forms for you, some employers prefer to do it themselves. Employers submitting the forms themselves will need to purchase IRS-approved software. There may be a fee to file electronically. The software will require a signature in one of two ways. The first way is by scanning and attaching Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return. The second is to apply for an online signature PIN. Taxpayers should allow at least 45 days to receive their PIN. The software will prompt the user on the steps needed to request the PIN.
Some of the forms employers can e-file include:
- Form 940, Employer’s Annual Federal Unemployment Tax Return – Employers use this form to report annual Federal Unemployment Tax Act tax.
- Form 941, Employer’s Quarterly Federal Tax Return – Employers use this form to report income taxes, social security tax or Medicare tax withheld from employees’ paychecks. They also use it to pay their portion of Social Security or Medicare tax.
- Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees – Employers file this form if they paid wages to one or more farmworkers and the wages were subject to social security and Medicare taxes or federal income tax withholding.
- Form 944, Employer’s Annual Federal Tax Return – Small employers use this form. These are employers whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less. These employers use this form to file and pay these taxes only once a year instead of every quarter.
- Form 945, Annual Return of Withheld Federal Income Tax – Employers use this form to report federal income tax withheld from nonpayroll payments.