Employer's Liability for Employment Taxes

In addition to federal income taxes and social security and Medicare taxes withheld from an employee's pay, there are employment-related taxes that the employer is responsible for.

An employer is liable for:

  • One-half of social security taxes
  • One-half of Medicare taxes
  • 100% of Federal Unemployment Insurance Tax (FUTA)
  • And in most cases, state unemployment taxes (SUTA)

State Withholding for Unemployment Insurance:

Employers pay into both federal and state unemployment funds. FUTA taxes are not withheld from an employee's wages. Most states do not withhold state unemployment taxes from employees' wages either. However, a few states do withhold unemployment taxes from employees' wages. Currently, these states include:

  1. Alaska
  2. New Jersey
  3. Pennsylvania

Check your state's requirements.

Federal Unemployment Taxes (FUTA)

Gross wages up to $7,000 paid to each employee for a calendar year are subject to FUTA taxes. For example, if you have two employees and paid gross wages of $15,000 to one of them and  $6,000 to the other, total FUTA wages subject to FUTA tax is $13,000 ($7,000 plus $6,000).

FUTA Tax Rate and Credits

For 2016, 2015, 2014, and 2013, the FUTA tax rate is 6.0% (.06). However, most employers get a credit of up to 5.4% (.054) against the tax, lowering it 3

to .6% (.006).

The credit is based on state unemployment tax paid to a state (including the District of Columbia, Pueto Rico, and the U.S. Virgin Islands) by January 31 (February 10, if that is your Form 940 due date).

An additional credit may be allowed if your experience rate is under 5.4% (.054). This applies even if your rate varies during the year. The additional credit is the difference between your actual state unemployments tax payments and the amount you would have been required to pay at 5.4%.

If you're a successor employer, you may be eligible to receive a credit for state unemployment taxes paid by a a predecessor.

Employers are entitled to the maximum credit of 5.4% if all state unemployment taxes were paid by the due date of your Form 940 or you were not required to pay state unemployment taxes during the calendar year due to your state experience rate.

If any wages that are subject to FUTA tax are not subject to state unemployment tax, you may be liable for FUTA tax at the maximum 6.0% rate. For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits are excluded from state unemployment tax.

Reporting FICA and FUTA Taxes

If you're self-employed and have regular business employees as well as household employees, you have two options for reporting FICA and FUTA taxes:

  • Report FICA and FUTA taxes and any income tax withholding for household employees annually of Schedule H, and report FICA taxes and any income tax withholdings for other employees quarterly on Form 941 and FUTA taxes annually of Form 940
  • Report FICA taxes and any income tax withholding for all employees (household employees and other employees) quarterly on Form 941 and report FUTA taxes annually on Form 940.

Don't Screw Up Trust Fund Taxes!

Federal employment taxes required to be withheld and remitted to the U.S. Treasury are called Trust Fund taxes. Non payment of these taxes can result in a penalty equal to 100% of the tax due. Moreover, if you intentionally don't turn these taxes over to the U.S. Treasury, you can face criminal prosecution.

One of the smartest moves you can make in your business if you have employees is to use a payroll service. You'll avoid the stiff penalties and the headaches of dealing with payroll tax reporting and payments.

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