What are Employment Taxes?

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Small business owners often have great responsibilities while operating and managing a business. Before you become an employer and hire employees, you need a Federal Employer Identification Number (EIN).If you have employees, you are responsible for several federal, state, and local taxes. As an employer, you must withhold certain taxes from your employees pay checks. Employment taxes include the following.

  • Federal income tax withholding
  • Social Security and Medicare taxes
  • Federal unemployment tax act (FUTA).

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. 

Which form do I file to report federal Income Taxes, Social Security, and Medicare taxes?

  • Form 941, Employer’s Quarterly Federal Tax Return
  • Form 943, Employer’s  Annual Federal Tax Return for Agriculture Employees (For use by farm employers)

Federal Unemployment (FUTA) Tax

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs.  You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax.  You pay FUTA tax only from your own funds.  Employees do not pay this tax or have it withheld from their pay.  Report FUTA taxes on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. 

Depositing Taxes

In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for Federal taxes.  However, some taxpayers are required to deposit using the Electronic Federal Tax Deposit System (EFTPS).  For additional information, refer to our Employment Taxes for Small Businesses page.

Certain Taxpayers May Now File Their Employment Taxes Annually
To reduce burden for certain small business taxpayers, employers who have an Employment Tax liability of $1,000 or less for the year will now file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941, Employer’s Quarterly Federal Tax Return.  Eligible taxpayers will be notified by mail.

 For references, related topics and more information visit the IRS website.

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