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Employment taxes, part 1: What are employers required to withhold?

The decision to add to employee headcount is a significant one for any employer.

After all, there are often good business reasons to use contractors rather than employees. In this age of the free-agent workforce, there are often such contractors available.

But let’s say you’ve made the decision to hire an employee and are uncertain about your payroll tax withholding obligations. In this two-part post, we will provide an overview of those obligations.

First of all, let’s say a word about vocabulary. The terms “payroll taxes” and “employment taxes” are often used interchangeably. We will follow this convention and treat them as synonymous terms.

At the outset, we should also note that the U.S. tax code requires employers to make deposits and reports of payroll taxes to the IRS at specified due dates. If employers do not pay over these taxes, it can lead to disputes with the IRS. For more information about such cases, please visit our page on payroll tax withholding.

There is of course also a requirement at the end of the year for employers to complete and file two basic forms. One is the W-2 form, detailing compensation paid to employees. The other is the W-3 form, which is used to transmit the W-2 form to the Social Security Administration (SSA).

The SSA is involved because Social Security taxes are one of the components of the payroll tax withholding issues we are discussing. Overall, payroll taxes include:
• Federal income tax
• Social Security taxes
• Medicare taxes
• Federal unemployment taxes

Before discussing details of these components, we should also note one other aspect of payroll taxes. For people who are self-employed, federal tax law imposes a self-employment (SE) tax. This SE tax is comparable to the taxes that are withheld for Social Security and Medicare contributions from most employees.

Source: IRS.gov, "Understanding Employment Taxes," Accessed May 6, 2014

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