Payroll taxes and employment taxes are taxes that employers pay directly to the Internal Revenue Service (IRS). There is overlap between these taxes, though there is a slight difference in where these terms are used and what is usually meant by them.
Employment taxes are paid to the IRS directly from the employer. These are federal income tax, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.
Payroll taxes are Social Security and Medicare contributions, but these are defined as payroll taxes only on IRS Form 941, the Employer's Quarterly Federal Tax Return.
Employment Tax Basics
The Internal Revenue Service uses the term employment taxes to refer to a list of taxes that relate to employees, including IRS federal income taxes withheld from employee pay and paid to the IRS on the employee's behalf.
- Federal income tax
- Federal Insurance Contribution Act (FICA) taxes
- Federal Unemployment Tax Act (FUTA) taxes
- Additional Medicare Tax.
Federal Insurance Contribution Act (FICA) taxes are the federal survivors, old age, and disability insurance taxes, known as Social Security, and hospital insurance tax, known as Medicare. These taxes are also withheld from employee pay and paid to the IRS.
Social Security and Medicare taxes provide benefits for retirees, those with disabilities, and children.
Social Security withholding is 12.4%, paid as 6.2% withheld from the employee, and 6.2% paid by the employer. Medicare is 2.9%, with 1.45% paid by both the employee and employer.
FUTA taxes are paid by employers based on the number of employees they have and unemployment rates. These taxes are not deducted from employee pay; only an employer pays them.
Employment taxes must be paid by employers, either through withholding from an employees' pay, by direct payment, or both. If you are self-employed, you must pay FICA taxes in the form of the self-employment tax.
Additional Medicare Tax
The Additional Medicare Tax is an employment tax imposed on some higher-earning employees. This is in addition to the usual Medicare contributions. Employers must withhold the Additional Medicare Tax on wages paid over $200,000 in a calendar year for any individual, regardless of that person's filing status.
Employees may need to file estimated tax payments to cover the full amount if the tax withheld by the employer is not sufficient. If the employee pays the full amount of the Additional Medicare tax, employers can file Forms 4669 and 4670 to be relieved of paying the tax themselves.
Payroll Tax Basics
Payroll taxes are the Social Security and Medicare taxes withheld from employees' pay and matched by employers.
The IRS seldom uses the term payroll taxes except when it applies to Form 941, the Employer's Quarterly Tax Return. This form should be filed once a quarter with the IRS to report the taxes you have been withholding.
All employees must have their taxes paid for them through withholding, whether they are full-time, part-time, or temporary.
Employer Tax Obligations
Employment taxes encompass all taxes employers must pay if they have employees, and payroll taxes are those taxes related to Form 941. The IRS addresses withholding for both FICA (Federal Income Contributions Act) taxes and federal income tax in this form.
- Withhold federal income taxes from employee pay
- Withhold FICA taxes from employee pay and pay those taxes, plus an equal amount from your business
- Withhold any state income taxes from employee pay
- Withhold the Additional Medicare Tax for employee's earnings over a required threshold
- Pay federal and state unemployment taxes, based on the number of employees you have
- Pay workers' compensation fees to state or federal agencies
- File Form 941 quarterly
Workers' compensation fees are paid to state or federal agencies and can vary depending on your location, industry, and number of employees.
When to Deposit Employment Taxes
Employers are legally obligated to place withholding on deposit. The rules for depositing can vary depending on the nature of your business and how much you withhold. Employers must deposit:
- Any federal income tax withheld
- The employer and employee portion of Social Security taxes
- The employer and employee portion of Medicare taxes
If you are self-employed, these deposits are covered by your quarterly tax payments.
Traditional employers must deposit either monthly or semi-weekly; the schedule you will need to use depends on the type of business you have. Most employers will file Forms 941, 944, or 945 and can determine their deposit schedule using Publication 15; employers with agricultural employees file Form 943 and will need to use Publication 51 to determine their schedule.
Monthly deposits are due by the 15th of the following month, and semi-weekly deposits are due on by the Wednesday following a Wednesday, Thursday, or Friday payment. If you paid your employees on Saturday, Sunday, Monday, or Tuesday, deposits must be made by the following Friday.
The regularity of state and local deposits can depend on the laws where you are reporting.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.