Your Guide to Employment Taxes - Part 1

Federal Income Taxes/Social Security and Medicare Taxes

You generally must withhold federal income tax from your employees wages.  To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employers Tax Guide and Publication 15-A, Employers Supplemental Tax Guide.

Social Security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA).
Social security tax pays for benefits under the old-age, survivors and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA.  You withhold part of these taxes from your employee's wages and you pay a matching amount yourself.

Federal Unemployment Tax

The Federal Unemployment Tax Act (FUTA), authorizes the IRS to collect a federal employer tax used to fund state workforce agencies.  Employers pay this tax, it is not deducted from the employee's wages.  The FUTA tax rate is 6.2% of taxable wages.  The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year.  Employers who pay the state unemployment tax, on a timely basis, will receive an offset credit of up to 5.4% regardless of the rate of tax they pay the state.  This generally makes the net federal tax rate 0.8% (6.2% 5.4%).  This would be a maximum of $56.00 per employee (0.8% x $7000), per year in federal tax.  This is based on timely payment of the state unemployment tax.  State tax rates and wage bases may vary from the federal.

State and Local Municipalities Taxes

Most states and many counties or cities charge taxes based on an individual's income.  The best place to start researching this is your state's Department of Revenue.

State Unemployment Taxes

The state unemployment tax, paid to state workforce agencies, is used solely for the payment of benefits to eligible unemployed workers.  The tax rate and wage base varies by state and experience rating.

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