Understanding employment taxes in the US

Considering how relevant they are in our day-to-day lives, employment taxes can be very complicated to understand. As the employer, it’s your job to deposit and report employment taxes and prepare and file Form W-2. This is used to report wages, tips and other compensation paid to your employees. In this blog, AAB Payroll Inc will focus on what you need to know about employment taxes in the US. We’ve also included links to some IRS articles and forms that you might find useful too.

What are considered employment taxes IN THE US?

Employment taxes include Federal Income Tax, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.

Firstly, we’ll look at the major taxes you will likely have to withhold.

Federal Income Tax

The first major tax withholding you will have to enforce is the Federal Income Tax. Use Form W-4 and either the Wage Bracket Method or Percentage Method withholding tables to figure out how much tax you’ll need to withhold. Once that is done, you will have to deposit the withholdings. The method of doing this will vary depending on your business and the amount withheld. We’ll look at depositing taxes later in this blog.

Social Security and Medicare Tax

These taxes are also important to withhold from your employee’s wages, only this time you will have to pay a matching amount yourself. To figure out how much tax that is, use following IRS guidance: Your tax responsibilities as an employer and Specialized and detailed employment tax information. You’ll also have to follow the requirements for depositing these withheld wages, as discussed below.

Federal Unemployment (FUTA) Tax

Federal Unemployment taxes are reported by employers separately from the taxes listed so far. Employees do not pay this tax or have it withheld from their taxes; instead, you pay FUTA directly from your own funds.

Depositing Employment Taxes

There are two deposit schedules you may be required to follow: monthly and fortnightly. You must determine which schedule you have to file before the beginning of each calendar year. This can be done by reviewing Publication 15 for Forms 941, 944 and 945, or Publication 51 for Form 943. Failing to make a timely deposit can subject you to a failure-to-deposit penalty of up to 15 percent, so make sure you’re fully aware of your deadlines.

You are required to make deposits for FUTA Tax (using Form 940) for the quarter within which the tax due exceeds $500. The deposit must then be made by the end of the month following the end of the quarter. All federal tax deposits must be made using electronic funds transfer (EFTPS).

Reporting Employment Taxes

It is the employer’s responsibility to report employment taxes, using the correct method as determined by the IRS. For Federal Income Tax, Social Security and Medicare Tax, employers must file Form 941 each quarter or Form 943 (Agriculture) or Form 944 (New Employer) annually. This includes withholdings on sick pay and supplemental unemployment benefits. FUTA taxes, which again only the employer pays, are reported by filing Form 940.

Employment Tax due dates

It’s important that employers file all the necessary reporting forms on time, to avoid the failure-to-deposit penalty. See the IRS Employment Tax Due Dates page for filing and depositing due dates.

Employment Taxes support

If you don’t know whether you’re meeting all the necessary US employment tax requirements, our team, based in Grand Rapids, Michigan, can help. We can take care of all your payroll needs, freeing up time for you to focus on running your business, and removing the burden of tax compliance. To see how our payroll software can be of benefit to your organisation, arrange a free, no-obligation payroll software demo, or speak to our expert payroll team today.