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
This new Task guides an employer through the process of adding a new hire to the payroll, from verifying an employee's right to work to ensuring proper withholdings.
Employers are required to use Form 941-X to correct errors they have made on a previously filed Form 941, Employer's Quarterly Federal Tax Return. Employers must file Form 941-X on paper and use a separate copy for each Form 941 they wish to correct.
An employee who receives sick pay - long-term or short-term disability pay - from an employer or a third party, such as an employer's agent or an insurance company, is required to pay Social Security and Medicare (FICA) taxes on the amounts received. Federal income tax withholding is mandatory or voluntary, depending on the payer. Although sick pay is taxable to the employee, and the employer must pay its matching share of FICA taxes, the employer and the third party may transfer liability between themselves for withholding, depositing and reporting the taxes attributable to the sick pay. Third-party sick pay is reported on Form 8922, Third-Party Sick Pay Recap, under certain circumstances. This How To explains to employers how reporting of third-party sick pay to the IRS is handled.
Employees often receive supplemental wages, which are taxable and subject to income tax withholding, FICA, and FUTA. For employees who receive up to $1 million a year in supplemental wages, employers have several different withholding methods from which to choose. This How To shows employers how to withhold on supplemental wages under the aggregate method.
The IRS has issued a proposed Revenue Procedure that provides employer guidance on employee consents used to support FICA (Social Security and Medicare) tax overpayment refund claims, excluding overpayments of Additional Medicare Tax.
Despite the DOMA decision handed down by the Supreme Court in Windsor, state laws still vary greatly regarding both the recognition of same-sex marriage and the taxation of benefits provided to an employee's same-sex spouse by an employer. This Quick Reference chart summarizes federal and state law regarding whether same-sex marriages, civil unions and/or domestic partnerships are recognized, and whether the value of benefits provided by an employer to an employee's same-sex spouse or civil union or domestic partner is taxable. This chart will be updated when any changes in these laws occur.
The IRS has issued guidance explaining how it will apply the Supreme Court's decision in United States v. Quality Stores, Inc. to claims for refund of employment taxes paid on severance payments.
This Worked Example illustrates how employers can make corrections when an employee is paid wages that they are not ultimately due.
This Worked Example illustrates how employers can establish a desired net pay amount by making a payment of wages where they "gross up" the amount so that the employee is paid enough wages to achieve the desired net.
This Worked Example illustrates how employers should calculate an employee's total FICA withholding for each pay period.
HR guidance on compliance with Social Security and Medicare (FICA) taxes, payroll taxes and federal unemployment insurance (FUTA) taxes.