Employment Tax Basics: Where is your US employee pay going?

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Employers are not only required by the Internal Revenue Service (IRS) to pay your business’s portion of taxes, but you are responsible for withdrawing specific taxes from employees. Individuals who are self-employed pay the same tax (with the same rate) that employees and employers pay, but it’s paid differently. Learn where tax dollars are going and how this tax is calculated.

Learn how this tax is calculated and how it works with your personal tax return.

What are employment taxes?

Employment taxes are paid directly to the IRS by the employer. These include federal income tax, the FICA taxes for Social Security and Medicare, and Federal Unemployment Tax Act (FUTA).

The Internal Revenue Service employment taxes refer to a group of taxes that affect employees, such as federal income taxes deducted from employee pay and paid to the IRS on their behalf. 

  • Federal income tax

All employers must withhold federal income from employees. The amount taken from each check is determined by an employee’s W-4 Form that they filled out when hired. The IRS withholding calculator is a helpful tool for employers and employees to figure out the correct amount to withhold.

  • Social Security and Medicare Federal Insurance Contribution Act (FICA) taxes

U.S. employers must deduct FICA taxes to fund Social Security and Medicare from the wages of their employees. Social Security and Medicare taxes provide benefits for retirees, those with disabilities, and children.

The Social Security withholding rate is 12.4%, with 6.2 percent deducted from the employee and 6.2 percent paid by the employer. The annual maximum wage that can be taxed changes based on the yearly average salary index; you can refer to Contribution And Benefit Base on the IRS website for annual breakdowns. Medicare is 2.9 percent, with both the employee and the employer paying 1.45 percent (with no maximum wage).

  • Additional Medicare Tax

The Additional Medicare Tax is 0.9% on top of the standard Medicare tax. Only higher-earning employees, whose income is over 200,000 in a calendar year, must pay extra in Medicare Tax.

  • Federal Unemployment Tax Act (FUTA)

Only employers are required to pay FUTA taxes; this tax provides benefits to workers who have lost their jobs. Personal employer funds are used to pay the FUTA tax. Employees are not required to pay this tax, nor is it deducted from their salary.

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Reporting and Paying Employment

The employer reports FICA taxes and income taxes deducted from employee pay on Form W-2, the yearly wage and tax report, to the employee. Using this information, the employee can fill out their tax return using either Form 1040 or 1040-SR.

Self-Employment (SE) Tax

Individuals who are self-employed (work for themselves) pay a self-employment tax to the Social Security Administration to cover Social Security and Medicare taxes. The SE tax is based on net earnings from a business a person owns. 

The tax rate for self-employment is 15.3 percent. The rate is divided into two parts: 12.4% for social security and 2.9% for Medicare. 

Note: It is important to note that while self-employed people do not pay unemployment taxes, they are also not eligible for unemployment benefits.

For more information on employment tax works, reach out to us directly and we can help you out.

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