As an employee, you may not have thought much about the procedures behind the issuance of your paycheck. But as a new business owner, you’ll need to understand how federal employment taxes work because you’ll have to withhold these payroll taxes from your employees’ paychecks. Here’s an overview of four types of payroll tax.
Social Security – Social security taxes are part of the Federal Insurance Contributions Act, also known as FICA. You’re required to withhold this tax from an employee’s wages each payday at a rate of 6.2%. As an employer, you’ll “match” the 6.2%, which means you pay a total of 12.4% when you make your payroll deposit. In 2016, you withhold and match social security taxes on the first $118,500 each employee earns.
Medicare – Medicare taxes are also part of FICA. You’re required to withhold Medicare from an employee’s wages at a rate of 1.45%. As an employer, you’ll match this 1.45%, for a total tax of 2.9%. Generally, all the wages you pay to your employees are subject to Medicare tax.
Additional Medicare – As an employer, you’re required to withhold an additional 0.9% tax from an employee’s wages when you pay that employee more than $200,000 per year. The withholding begins when the employee’s wages exceed $200,000. You’re not required to match the Additional Medicare Tax.
Federal income tax. The amount of federal income tax that you withhold from an employee’s wages is based on Form W-4, “Employee’s Withholding Allowance Certificate,” which is completed by each employee. Use the information on Form W-4 to determine the correct amount of withholding from tables provided by the IRS.
In addition to the taxes you withhold from your employees’ paychecks, your business may also have to pay other payroll taxes such as federal and state unemployment. If you need help, be sure to contact your tax professional.