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Employment Taxes

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Federal Income Tax and Social Security and Medicare Taxes

You generally must withhold federal income tax from your employees' wages. You withhold part of Social Security and Medicare taxes from your employees' wages and you pay a matching amount yourself. To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide (PDF).

The Internal Revenue Service recently released instructions to help employers implement the 2011 and 2012 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011 and 2012.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011, but not later than Jan. 31, 2011.

Notice 1036 (PDF) contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employers Tax Guide (PDF), contains the percentage method tables and the wage bracket tables that some employers use.

Federal Unemployment (FUTA) Tax

You report and pay FUTA tax separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide (PDF) for more information on FUTA tax.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

Depositing Employment Taxes

Beginning January 1, 2011, taxpayers must deposit all depository taxes (such as employment tax, excise tax, and corporate income tax) electronically using the Electronic Federal Tax Payment System (EFTPS). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after December 31, 2010. See Treasury Decision 9507 for more information.

Reporting Employment Taxes

In general, employers must report federal income taxes withheld, and the employer’s and employees’ shares of social security and Medicare taxes (collectively “employment taxes”) on either Forms 941, Employer's QUARTERLY Federal Tax Return (PDF) ( Instructions (PDF) available here), or Form 944, Employer’s ANNUAL Federal Tax Return (PDF) ( Instructions (PDF) available here). Form 943, Employer's Annual Federal Tax Return for Agricultural Employees (PDF) ( Instructions (PDF) available here) is used by employers who pay wages to farmworkers.

If you have been filing Forms 941 and believe your employment taxes for the calendar year will be $1,000 or less, and you would like to file Form 944 instead of Forms 941, you must contact the IRS to request to file Form 944 rather than Form 941. You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form.  Refer to Certain Taxpayers May File Their Employment Taxes Annually for more information.

Conversely, if you received notice from the IRS and have been filing Form 944 but would like to file Forms 941 instead, you must contact the IRS to request to file Forms 941.  You must receive written notice from the IRS to file Forms 941 instead of Form 944 before you may file these forms.  Refer to Certain Taxpayers May File Their Employment Taxes Annually for more information.

Report FUTA taxes on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (PDF) ( Instructions (PDF) available here).

e-file for Business and Self-Employed Taxpayers

Whether you're a business, big or small, or are self-employed you'll find an e-file for business filing option that meets your needs. Use IRS e-file for Employment Tax Returns, Information Returns, Partnerships, Corporations, Estates & Trusts, plus Exempt Organizations.

Preparing and Filing Form W-2

At the end of the year, the employer must complete Form W-2, Wage and Tax Statement (PDF) to report wages, tips and other compensation paid to an employee. A copy of this form must be given to the employee by January 31st after the end of the year. You must also send a copy of the W-2 to the Social Security Administration (SSA). Employers can prepare and file up to 20 W-2s at a time at the Social Security Administration’s Web site. Using SSA’s online W-2 filing, employers can also print out all the necessary copies of the W-2 for their employees, state taxing agencies, etc.

Correcting/Adjusting Employment Taxes

If correcting employment tax errors on previously filed employment tax returns is required, refer to Correcting Employment Taxes.

Voluntary Classification Settlement Program

The Voluntary Classification Settlement Program (VCSP) is a new optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Outsourcing Payroll Duties

If you outsource your payroll, refer to Outsourcing Payroll and Third Party Payers.

Independent Contractor (Self-Employed) or Employee?

Which workers are considered employees? Before you can know how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. Refer to Independent Contractor (Self-Employed) or Employee? for more information.

Combined Annual Wage Reporting (CAWR)

Combined Annual Wage Reporting (CAWR) is a Document Matching Program that compares the Employee Wage Information reported by the employer to the Internal Revenue Service (IRS) and the Social Security Administration (SSA). If the amounts reported to the IRS do not match those from SSA, you may receive a notice asking for the reason for the discrepancy. If you do not respond timely, IRS may compute the additional taxes and/or penalties due and send you a bill. If you receive a notice CP253 or Letter 99C regarding missing Form(s) W-2, refer to Combined Annual Wage Reporting Missing Form W-2 Inquiries. If you receive a notice CP251 or Letter 99C regarding underreported employment taxes refer to Combined Annual Wage Reporting Employment Tax Problem Inquiries.

Additional Medicare Tax

Beginning January 1, 2013, the Additional Medicare Tax applies to an individual’s Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the taxpayer’s filing status.

Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages and compensation paid in excess of $200,000 in a calendar year. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages and compensation in excess of $200,000 to an employee.

There is no employer match for the Additional Medicare Tax.

For additional information see our questions and answers.

References/Related Topics

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Page Last Reviewed or Updated: 27-Sep-2012

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