Employment Taxes

Employment Taxes

Last revised: February 8, 2018

When you start a business, it’s important to understand your employment tax obligations from the beginning. Employment taxes include federal income tax, social security and Medicare taxes, federal unemployment (FUTA) tax, and self-employment tax. You are also responsible for your state’s employment taxes, including workers’ compensation insurance and unemployment insurance taxes.

Federal Income Tax

If you have employees, you will have to withhold federal income tax from your employees’ paychecks. When you first hire an employee, you will have them fill out Form W-4 to determine how much income tax you have to withhold from each paycheck.

Social Security and Medicare Taxes

You are required to withhold social security and Medicare taxes from your employees’ paychecks and pay the employer’s portion of these taxes.

For tax year 2017, the social security tax rate is 6.2%. You will withhold 6.2% from your employees’ paychecks and match that amount, so that between you and your employees, you are paying 12.4% in social security taxes. Social security taxes have a wage base limit, which is the maximum wage subject to the tax for the year. In 2017, the social security tax wage base limit is $128,400.

In 2017, the Medicare tax rate is 1.45%. You will withhold 1.45% from your employees’ paychecks and match that amount, so that between you and your employees, you are paying 2.9% in Medicare taxes. There is no wage base limit for Medicare taxes.

Federal Unemployment (FUTA) Tax

Your employees are not responsible for the FUTA tax at all. You pay FUTA tax only from your business’s funds.

For 2017, the FUTA tax rate is 6%, but this tax only applies to the first $7,000 you pay each employee during the calendar year.

For depositing purposes, determine your FUTA tax liability quarterly. To do this, multiply the amount of wages paid during the quarter by 6%. Make sure to stop depositing FUTA tax on an employee’s wages when they reach $7,000 in wages for the calendar year.

If your FUTA tax liability for a quarter is $500 or less, you can carry that amount forward and add it to your liability for the next quarter. You will continue to do this until your FUTA tax liability is more than $500. You will deposit your FUTA tax through the Electronic Federal Tax Payment System® (EFTPS).

For each quarter, you have to deposit your FUTA tax by the last day of the first month that follows the end of the quarter. For example, the first quarter ends on March 31, so you would make your first quarter deposit by April 30.

You use Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report your FUTA tax. For the tax year 2017, Form 940 is due by January 31, 2018.

Self-Employment Tax

Self-employment tax is similar to the social security and Medicare taxes withheld from employees’ paychecks, but for people who work primarily for themselves. You calculate your self-employment tax by using Schedule SE for Form 1040.

For the 2017 tax year, the self-employment tax rate is 15.3%.

If you expect to owe $1,000 or more in taxes when you file your return, you may have to pay estimated tax quarterly. You can calculate your estimated taxes using Form 1040-ES. You’ll have to calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year; you can use your prior year’s numbers as a starting point, if you have them. There are four payment periods for estimated taxes:

For the Period: Due Date:
January 1 – March 31 April 18
April 1 – May 31 June 15
June 1 – August 31 September 15
September 1 – December 31 January 16, 2018

State Taxes

In addition to federal employment taxes, as an employer, you are also responsible for your state’s employment taxes. Your state employment taxes can include workers’ compensation insurance and unemployment insurance taxes.

If you are in California, Hawaii, New Jersey, New York, Rhode Island, or Puerto Rico, you are also responsible for temporary disability insurance.