Small Business Guide to Low Stress, High Success: Tax Liability

Employment taxes

We typically think of taxes as a once a year rodeo. There are, however, taxes that are reported and paid on a regular basis, such as employment taxes.

If you as a small business owner have employed other individuals on an hourly or salary basis, then you are responsible for paying certain types of taxes to the government.

As an employer not only must you pay and report employment taxes to the government, you are also required to prepare W-2 forms to report wages, tips, and other compensation paid to your employees.

There are two main factors that you have to pay attention to when it comes to employment taxes: reporting schedules and the different types of taxes.

Tax Types

There are several categories of taxes that an employer is responsible for and you must make sure that you are not only withholding them, but also that they’re making it to the correct place.

As an employer, you are responsible for calculating and reporting your tax liability and for withholding a specified amount of taxes from your employee wages.

Federal Income Tax

You are responsible for withholding Federal Income Tax from employee wages. This is determined by the employee W-4 Form and withholding tables, which can be found here.

Social Security and Medicare Taxes

In most cases, you as an employer are required to withhold Social Security and Medicare taxes from your employee's wages, and you are even required to pay in a matching amount of those taxes as the employer. To determine how much to withhold, reference publication 15. 

You may also be required to withhold Additional Medicare taxes (0.9%) from employee wages that hit a certain threshold, but you as an employer are not required to match the additional medicare tax.

Federal Unemployment Tax (FUTA)

Employers are responsible for reporting and paying FUTA separately from income, social security, and medicare employments taxes. Employees do not pay this tax or have it withheld.

Self Employment Tax

This is similar to the medicare and social security taxes that are withheld from employee wages, except that they apply to the business income and they are paid by you, the business owner. For more information on Self Employment Taxes and details, see our blog here.

Depositing and Reporting Taxes

You must deposit Federal Income Tax and both employee and employer Social Security Tax and Medicare Tax on a regular basis. You will either deposit these taxes on a monthly or semi-weekly basis, according to Publication 15.

And it is critical that these taxes are paid on time!

Deposits for FUTA are usually paid annually but are sometimes required to be paid quarterly.

Reporting

Employers are required to report wages, other compensation, and tips by filing required forms and submitting them to the IRS (and also likely your state). You must also report the employment taxes that you deposit.

Generally, an employer must file a Form 941 to report withheld income, social security, and medicare taxes. You will report any FUTA on a form 940.

At the end of each year, you as the business owner, are required to complete a W-2 for each employee to report wages and compensations, as well as form W-3, Transmittal of Wage and Tax Statements that goes to the social security administration.

State Specific

Beware that every state has their own payroll tax withholding and reporting requirements and if you are operating in multiple states you may have to report in more than one place.  Be sure to check with your state employment department to make sure you are being compliant.

For a list of small business and self-employed tax forms, go here.

Disclaimer This article presents general information and is not intended to be tax or legal advice.  Refer to IRS publications and discuss possible tax deductions with your tax preparer.