Overview: Employers are required to withhold employment/ payroll taxes from employees' pay and remit and report the amounts withheld to the federal government. Employment taxes include Social Security and Medicare (FICA) taxes and federal unemployment insurance (FUTA) taxes. Employers that fail to fulfill these requirements are liable for serious penalties. HR managers that oversee payroll departments are responsible for avoiding such penalties by ensuring that employment tax laws are being complied with.
Both employers and employees are required to pay FICA taxes to fund the Social Security and Medicare programs. Employers withhold the employee share of FICA taxes from employees' wages, make a matching contribution in the same amount, and then pay both shares to the federal government.
FUTA taxes fund unemployment insurance benefit payments to employees who have lost their jobs through no fault of their own. Only employers pay FUTA taxes; they are not withheld from employees' wages.
Employment Tax Rates:
FICA. The Social Security tax rate is 6.2% up to a taxable wage base of $118,500 for 2015, which is an increase from the 2014 wage base of $117,000. There is no limit on the amount of wages subject to Medicare tax withholding; the rate is currently 1.45%. However, single employees earning more than $200,000, and married couples who file joint tax returns and earn more than $250,000, pay an additional 0.9% Medicare tax. High earners, therefore, pay the 1.45% Medicare tax rate plus the additional 0.9%, for a total Medicare tax rate of 2.35%. Employers do not pay the additional 0.9% tax.
FUTA. The base FUTA tax rate is 6% up to a taxable wage base of $7,000. Employers may be able to reduce their overall FUTA liability by taking credits against state unemployment insurance contributions paid. Beware that these credits may be reduced if the state where the employer is located is a credit reduction state - a state that has borrowed money from the federal government to pay regular benefits but has failed to pay back the loans by certain dates. The US Department of Labor certifies by each November 10 which states have taken steps toward financial solvency.
Author: Rena Pirsos, JD, Legal Editor
Updated with new IRC reference dates for Arizona, Hawaii, Indiana, Iowa, Kentucky, Maine, Oregon and South Carolina.
Updated to reflect accelerated Form W-2 filing dates in Idaho, Oregon and South Carolina, effective with 2016 forms filed in 2017.
Updated to reflect accelerated annual Form W-2 filing date to January 31, effective with 2016 forms filed in 2017.
Updated to reflect a decrease in the foreign housing-cost exclusion amount for 2016.
Updated to include the terminal charge and SIFL mileage rates for the first half of 2016.
Updated to include acceleration of annual Form WR filling date to January 31, effective with 2016 forms filed in 2017.
In-depth review of the spectrum of Ohio employment law requirements HR must follow with respect to withholding taxes
In-depth review of the spectrum of Illinois employment law requirements HR must follow with respect to withholding taxes.
In-depth review of the spectrum of West Virginia employment law requirements HR must follow with respect to depositing and reporting withheld taxes.
HR guidance on compliance with Social Security and Medicare (FICA) taxes, payroll taxes and federal unemployment insurance (FUTA) taxes.