Each year, your business earns revenue, while your employees earn wages and benefits.
Of course, federal and state governments want to ensure that they are getting their piece of the collective pie as well. In addition to your business’s share of taxes, you’re also largely responsible for making sure that you withhold and pay the right amount of taxes to the government on behalf of your employees.
Whether you’re a large business, small business, or a self-employed individual, here are seven different types of employment taxes you should know about.
1. Federal and State Unemployment Tax
While most types of employment tax require the employee to make some kind of contribution, both federal and state unemployment tax is the responsibility of the employer. The employee is not required to have this tax withheld in the event that they lose their job and must collect unemployment benefits.
Similar to income tax, unemployment is taxed on both federal and state levels. The Federal Unemployment Tax (FUTA) rate is 6% of the first $7,000 per pay period, while State Unemployment Tax (SUTA) tax rates and requirements may differ from state to state.
While the majority of states require employer contributions, there are certain states that also require employee contributions to the tax.
2. Federal Income Tax
Federal income tax is the portion of an employee’s gross wages that is paid to the Internal Revenue Service (IRS). The U.S. federal government then uses this money to fund all kinds of government systems, programs, and initiatives—as well as to contribute to social security and medicare.
Using an employee’s completed W-4, the employer is required to withhold a certain percentage of federal income tax. The employer then reports earnings and deposits the tax withheld on either a monthly or semi-weekly schedule.
If you’re self-employed, you may be required to calculate and make estimated quarterly tax payments to the IRS in place of conventional federal income tax withholding.
3. State Income Tax
In most states, employers are also required to withhold a certain percentage of an employee’s gross wages as a state income tax. Some of these states use the federal government’s W-4 form, while other states elect to use their own forms instead.
State income tax rates can vary quite drastically by state. Currently, California has the highest state income tax rate at 13.3%, while there are nine states that do not require state income taxes at all—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
4. FICA Tax (Social Security and Medicare)
Federal income tax is perhaps the most well-known type of employment tax, but according to a report from the Joint Committee on Taxation (JCT), most Americans actually pay more in payroll tax.
Federal Insurance Contributions Act (FICA) is made up of two different types of payroll tax—social security and medicare. The current tax rates for these programs are 6.2% and 1.45%, respectively, and both employer and employee are required to pay these taxes for a total contribution of 15.3%.
Of course, the employer is responsible for withholding the employee’s portion, as well as sending both portions of the FICA tax to the IRS each period.
5. Additional Medicare Tax
In addition to FICA tax withholdings, the employer may also be required to withhold and remit an additional .09% of the employee’s gross income as an Additional Medicare Tax.
The Additional Medicare Tax is only required when an employee earns more than $200,000 in total annual income.
6. Self-Employment Tax
If you’re self-employed, you may not have to worry about all of the different types of business taxes and employment taxes that conventional large and small businesses have to pay.
Instead, you will be responsible for paying a self-employment (SE) tax in addition to your federal and state income taxes.
Often referred to as the Self-Employed Contributions Act (SECA), self-employment tax is paid on net earnings (gross earnings minus expenses) and is often used by the government to fund social security and medicare programs.
7. Workers’ Compensation Benefit Funds
While not a tax, per se, most states (in fact, all states except for Texas) require employers to contribute to workers’ compensation benefit funds.
These funds typically provide four different types of benefits—medical coverage, disability benefits, rehabilitation, and death benefits—for employees who sustain long-term injuries while on the job and are subsequently unable to work.
Workers’ compensation regulation laws vary by state. Depending on your state, you may be able to fulfill workers’ compensation requirements by contributing to a state fund, private fund, or through self-insurance.
