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Payroll Taxes

Payroll taxes are taxes withheld or paid by an employer for or on behalf of employees. Payroll taxes include federal income tax withholding, state income tax withholding, Social Security taxes, and Medicare taxes. They also include federal and state unemployment taxes. Employers must navigate these responsibilities in accordance with federal law, as regulated by the IRS and the Department of Labor.

The relationship between employment tax and the total sum of the employee's wages and benefits underscores the financial responsibilities involved in the employer-employee dynamic. Understanding the scope of payroll taxes is essential for both employers and employees. This ensures accurate allocation of employee's wages and compliance with tax regulations.

Employee or Independent Contractor?

Determining the tax treatment of service payments involves first identifying whether one is categorized as an independent contractor or an employee. Independent contractors operate independently and offer services to the public. Traditionally, individuals performing services are deemed employees if the payor can control the details of service execution. Small business owners and the self-employed must be mindful of this classification. It directly impacts their tax obligations.

Your tax rate, tax return, and other financial considerations will vary depending on whether you are an employee or an independent contractor. Self-employed individuals, falling into the latter category, bear unique tax responsibilities as taxpayers. Small businesses, in particular, must navigate these distinctions to ensure compliance with tax regulations.

Facts indicative of an employment relationship include:

  • Instructions as to when, where, and how to perform the work
  • Payor-provided training
  • Reimbursement of business expenses
  • Payment by the hour, week, or month
  • Payment of employee-type benefits such as insurance, vacation, and retirement benefits

Facts indicative of an independent contractor relationship include:

  • Emphasis on results
  • Independent training
  • Unreimbursed business expenses
  • Investment by the worker in work facilities
  • Payment by the job rather than by time period
  • The extent to which the worker can realize a profit or loss on the transaction

Payroll Taxes for Employees

If an individual is an employee, the employer must withhold payroll taxes. Employers are authorized to deduct specific items from an employee's wages. They can deduct taxes, insurance premiums (such as health insurance and disability insurance), and union dues. The amount withheld depends on the following:

  • Amount of wages paid
  • Filing status (i.e., single or married)
  • Number of pay periods
  • Number of allowances claimed by the employee

In addition to income taxes, employers may withhold for various insurance coverages, like unemployment insurance and workers' compensation.

Employees are required to give the employer a signed Form W-4. This form indicates the filing status and number of personal allowances claimed. The employee then completes a worksheet provided with Form W-4. The worksheet assists with the computation of the correct number of personal allowances. An employee can claim fewer personal allowances but can't claim more.

Social Security Taxes

The obligation to pay social security taxes is shared between the employer and the employee. Each contributes to this vital program overseen by the Social Security Administration. The employer pays 6.2% of the taxable wage base and withholds 6.2% of a fixed taxable wage base from the employee. Both the employer and employee are also required to pay Medicare taxes. The employer pays 1.45% of wages and the employer withholds another 1.45% from the employee. Wages for social security purposes include 401(k) contributions and deferred compensation.

Unemployment Taxes

Employers also must pay federal and, where applicable, state unemployment taxes. The tax applies to the first $7,000 of wages paid to each employee. For state unemployment taxes, the rate of tax and wage base will differ from state to state. But an employer can take a credit against federal unemployment for amounts paid to state unemployment funds up to a fixed percentage of taxable wages.

Form W-2

Employers are required to provide each employee with a Form W-2. This form is an annual summary of wages paid and taxes withheld. The employer also files Form W-2 with the IRS and state taxing departments. The form is due to the employee by January 31 of the year following that for which income taxes will be filed. For employees filing income taxes for 2023, employers must provide a Form W-2 by January 31, 2024.

Legal Help

If you find yourself facing challenges with your employer regarding payroll tax withholdings or wage garnishment, you should seek the assistance of an attorney specializing in labor law. An attorney can provide valuable legal advice and take appropriate action to address any concerns related to your wages and payroll deduction. Contact an employment law attorney near you today.

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