Employment taxes

Employers are responsible for several federal, state, and local employment taxes. At the federal level, these include:

Income tax,
Social Security and Medicare taxes, and
Unemployment taxes.

Requirements for employers include withholding, depositing, reporting, and paying employment taxes. There are forms that employers must give to employees, those that employees must give to employers, and those that employers must send to the Internal Revenue Service (IRS) and Social Security Administration (SSA).

Income tax

Wages subject to federal employment taxes include all pay given to an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. It does not matter how the payments are measured or made. Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes.

Social Security/Medicare

The Federal Insurance Contributions Act (FICA) provides for a federal system of old-age, survivors, disability, and hospital insurance. The old-age, survivors, and disability insurance part is financed by the Social Security tax. The hospital insurance part is financed by the Medicare tax. Each of these taxes is reported separately.

Generally, employers are required to withhold Social Security and Medicare taxes from employees’ wages and must also pay a matching amount of these taxes. Certain types of wages and compensation are not subject to Social Security taxes. Generally, employee wages are subject to Social Security and Medicare taxes regardless of the employee’s age or whether he or she is receiving Social Security benefits.

Federal Unemployment (FUTA) Tax

The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.

Employer Identification Number (EIN)

If an employer is required to report employment taxes or give tax statements to employees or annuitants, they need an EIN.

The EIN is a nine-digit number that the IRS issues. The digits are arranged as follows: 00-0000000. It is used to identify the tax accounts of employers. The EIN must appear on all of the items sent to the IRS and SSA.

Basic compliance requirements

Below are the basic requirements for tax and wage reporting compliance:

Determine employer identification number (EIN) requirements. Complete and submit EIN Request Form SS-4 if you do not have an EIN.
Determine employee status, verify work eligibility by filing Form I-9.
Request Form W-4, the employee withholding form, verify employee ID information (SSN), and receive if applicable, earned income credit (EIC) eligibility by filing Form W-5. Employers should not pay the advance credit out if the employee doesn’t qualify. Internal Revenue Code requires that on any tax return claiming the earned income credit (EIC), the husband must have an SSN (not an ITIN); the wife must have an SSN (not an ITIN); and any qualifying child must have an SSN (not an ITIN).
Calculate and deduct employees’ income tax, Social Security, and Medicare amounts.
Make required deposits of taxes withheld plus any related employer taxes.
File Form 941 quarterly, and Form 940 annually. Send in Forms W-4 each quarter with Form 941 when the employee claims more than 10 withholding allowances; or exemption from withholding, and his or her wages would normally be more than $200 per week.
Other forms may also be required (e.g. Form 943 for agricultural labor).
File Form(s) W-2 (Wage and Tax Statement).
File Form(s) W-3 (Transmittal of Wage and Tax Statement).
File Form 945 (Annual Return of Withheld Federal Income Tax for non-payroll payments).
File Form 1096 (Annual Summary and Transmittal of U.S. Information Returns).
1099 Forms - For certain types of income, a Form 1099 must be used with the federal tax return. Employers will not usually attach a 1099 series form to their return, except when they receive a Form 1099-R that shows income tax withheld. Keep all other 1099s with tax records. There are numerous 1099s.
File Form 8027 (Employer’s Annual Informational Return of Tip Income and Allocated Tips).
Check for required information returns and file those applicable to your business.
Complete Form W-5 (Earned Income Credit Advance Payment Certificate) This form is retained by the employer.
Determine business tax and wage reporting records to be kept, determine period to be kept, and maintain records.

Recordkeeping

IRS requires that employers keep all records of employment taxes for at least four years. These should be available for IRS review. Records should include:

Employer identification number (EIN).
Amounts and dates of all wage, annuity, and pension payments.
Amounts of tips reported.
Records of allocated tips.
The fair market value of in-kind wages paid.
Names, addresses, social security numbers, and occupations of employees and recipients.
Any employee copies of Forms W-2 and W-2c that were returned as undeliverable.
Dates of employment.
Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments the employer or third-party payers made to them.
Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
Dates and amounts of tax deposits that the employer made and acknowledgment numbers for deposits made by EFTPS.
Copies of returns filed, including Form 941TeleFile Tax Records and confirmation numbers.
Records of fringe benefits provided, including substantiation.

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