Employment Taxes and Withholding
If you hire employees to assist you in running your small business, you should be aware of your legal obligation to withhold certain taxes from your employee(s)'s paychecks, and to pay and report certain employment taxes.
Federal Income Tax Withholding (FIT)
Employers are required to withhold income taxes from employee paychecks based on each employee's marital status, amount of wages earned, and the number of withholding allowances. Employers must get an Employee's Withholding Allowance Certificate (W-4 form) from each employee indicating the number of withholding allowances. W-4 forms are available through the IRS.
Social Security Tax (FICA)
Employers are required to withhold employees' share of the Social Security and Medicare tax from wages, and are also required to match each employee's contribution.
Federal Unemployment Tax (FUTA)
Most employers are required to report and pay federal unemployment tax (FUTA), though sole proprietorships and partnerships do not pay FUTA on owners' compensation.
Employers are required to make periodic deposits of withheld Income tax, Social Security and Medicare taxes. There are substantial penalties for failure to make timely deposits.
State Employment Taxes
In addition to your federal tax obligations as an employer, tax laws in your state will require you to withhold state taxes from your employee(s)'s pay, and to report and pay state employment taxes.