Employees, employers, and self-employed persons pay social security and Medicare taxes.
When referring to employees, these taxes are commonly called FICA taxes (Federal Insurance Contributions Act). When referring to self-employed persons, these same taxes are referred to as self-employment taxes, which are figured on Schedule SE by self-employed individuals.
If a person has a job and is also self-employed, the gross compensation from the job plus net income from self-employment are added together and counted toward the maximum social security wage base for the tax year.
Social Security Wage Base:
Medicare Taxes: Every dollar of wages, salary, bonuses, and other compensation is subject to Medicare taxes. Unlike the income limitation for Social Security taxes, there is no income limitation for Medicare taxes.
Self-Employed Persons:
The self-employment tax rate for 2024 is 15.3%. This rate equals the total social security rate of 12.4% plus the total Medicare rate of 2.9%. Unlike employers and employees, who each pay one-half of the social security and Medicare tax rates, self-employed persons pay both halves, 15.3%.
A trust fund tax is money withheld from an employee's wages by an employer and held in trust until paid to the Treasury. Trust fund taxes include income taxes, Social Security taxes, and Medicare taxes.
Congress has established large penalties for delays in turning over employment taxes to the Treasury. In addition, if you intentionally don't turn these taxes over to the U.S. Treasury, you can face criminal prosecution.
Using a payroll service is a low cost and effective way of handling the complexities involved in payroll processing and avoiding stiff noncompliance penalties. A payroll preparation service will do the tax computations, file the quarterly and annual payroll tax returns, remit payroll taxes to the IRS on your behalf, issue paychecks and provide you with periodic payroll reports for your records.