Payroll Taxes and Withholding
Created by FindLaw's team of legal writers and editors | Last reviewed February 21, 2018
Now that you've started your business, which has grown faster than you expected, you're beginning to realize you can't run it all yourself. To put it simply, you need employees. While it can help you alleviate some of your responsibilities, hiring employees will add new ones. One of your main responsibilities regarding employees will be to withhold what are commonly referred to as "payroll taxes" from their paychecks. You will also be required to report and pay certain employment taxes.
Are There Payroll Taxes for Independent Contractors?
No. Employers are only required to withhold taxes for employees. If you hire an independent contractor, it is his or her responsibility to pay any required taxes (typically when filing their individual tax returns). This is one of the reasons businesses like to hire independent contractors. While there are benefits to hiring independent contractors instead of employees, it's important to avoid misclassifying your workers. The misclassification of employees as independent contractors can get your business into serious legal trouble, especially with the IRS.
Federal Income Tax Withholding
Employers are required by law to withhold income taxes from each employee's paycheck. The amount depends on various factors, including the employee's marital status, the amount of wages earned, and the number of withholding allowances. The employer can determine the amount to withhold by having each employee fill out an Employee's Withholding Allowance Certificate (Form W-4).
Social Security and Medicare Tax
Every employer is required to withhold each employee's share of the Social Security and Medicare tax, which are withheld from gross wages. In addition, the employer is also required to match each employee's contribution.
Federal Unemployment Tax
Most employers are also required to report and pay federal unemployment tax, which is just another component to payroll taxes. Sole proprietorships and partnerships do not pay federal unemployment tax on an owner's compensation. While this may sound appealing, it's important to know that sole proprietorships and partnerships have other downsides, such as a lack of protection from personal liability for the business owner.
In addition to withholding taxes from employees' paychecks, employers also have to make periodic deposits. These deposits apply to the withheld income tax, Social Security tax, and Medicare tax. Your state may also require periodic deposits of withheld state taxes. The withheld amount may be required to be deposited on an annual, quarterly, monthly, or semi-weekly basis. Keep in mind that failure to make timely deposits can result in substantial penalties to your business.
State Employment Taxes
In addition to federal tax obligations that an employer has, each employer is also subject to state tax laws. The state taxes that you will need to withhold will vary from state to state. In California, for example, employers must withhold state income tax and State Disability Insurance. Be sure to check with your state to find out what you need to withhold under state law.
For more information and resources related to this topic, please visit FindLaw's section on Business Taxes.
Have Questions About Payroll Taxes and Withholding? Ask an Attorney
Payroll taxes can be a complicated subject area for many people, especially those who are busy owning and operating their own business. Don't leave your business exposed. Instead, reach out to a local tax attorney to ensure that your company is in full compliance and utilizing every benefit the tax code has to offer.
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