Payroll Tax Rates and Forms

FICA Tax Liability

FICA taxes include Social Security (OASDI) and Medicare. The Social Security tax rate applies only to wages paid within a Social Security wage base ($117,000 for 2014). There is no cap on wages subject to the Medicare tax.

Your share of FICA taxes is 7.65 percent (6.2% for social security tax and 1.45% for Medicare tax) of the employee's social security and Medicare wages. Your employee's share is also 7.65 percent. Once the wage base is reached, both the employer-share and the employer share is 1.45 percent on the full amount of compensation.

You can either withhold your employee's share from the employee's wages or pay it from your own funds. If you decide to pay the employee's share from your own funds, the social security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

Additional 0.9 Percent Medicare Tax. The employee's portion of the Medicare tax is increased by 0.9 percent (from 1.45 percent to 2.35 percent) on earning over $200,000 ($250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing separately). In the case of a joint return, the additional tax is imposed on the couple's combined wages. Although the employer is generally required to withhold the employee's portion from the employee's wages, the employer is not obligated to withhold the additional tax unless the employee receives wages from the employer in excess of $200,000, regardless of whether the employee is married or single.

Federal Unemployment Taxes

You will also have to pay federal unemployment taxes on the first $7,000 of your employee's wages. Multiply the portion of the wages that you paid by 6 percent. Be sure to check with your state department of labor for the rules on state unemployment tax, since you will generally have to pay that tax as well.

Household Employees

If you are required to pay employment taxes on domestic help, you can pay them along with your regular income tax on Form 1040. However, you will need to complete Schedule H, Household Employment Taxes, and attach it to your tax return. You can call 1-800-TAX-FORM or go to the IRS website to get a copy of this form and its instructions, which will walk you through the procedures for completing the form. Also ask for a copy of IRS Publication 926, Household Employer's Tax Guide, which explains more about the responsibilities of employers, including the need to file annual W-2 forms for each employee.

Planning Tools You can download Schedule H to aid in your financial planning.

You may have to pay an estimated tax penalty if your total tax bill, including taxes on household workers, is over $1,000 more than the tax you prepaid throughout the year through estimated tax payments or payroll withholding. To avoid this penalty, it's generally necessary to estimate the household taxes you'll be liable for during the year, and use your estimate to increase the withholding amount on any paychecks you receive, or add the amount to your quarterly estimated tax payments during the year.

© 2024 Wolters Kluwer. All Rights Reserved.