Employment Taxes

 

Ø  Employment Taxes:

·  The employer must also withhold the employee’s share of Social Security and Medicare taxes from wages, and pay the corresponding employer’s share of each tax.

·     Employers must report federal income taxes withheld and employment taxes on Form 941

·       Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return.

·  Businesses must also make federal tax deposits of income and employment taxes electronically, generally by using the Electronic Federal Tax Payment System  (EFTPS) 

Ø Federal unemployment tax (fUTA) 

·       The Federal Unemployment Tax Act (FUTA), provides for payments of unemployment compensation to workers who have lost their jobs.

·       A business reports and pays FUTA tax separately from federal income tax, and Social Security and Medicare taxes.

·       FUTA tax is paid only by the employer, never by the employee. The current FUTA tax rate is 6% on the first $7,000 of each employee’s wages.

·       Most employers receive a maximum credit of up to 5.4% against this FUTA tax for any unemployment tax paid to the state

Ø  ADDITIONAL MEDICARE TAX

·       An Additional Medicare Tax of 0.9% (.009) applies to an individual taxpayer’s earned income that exceeds the following thresholds

· An employer is required to withhold the Additional Medicare tax if an employee is paid more    than $200,000, regardless of an employee’s filing status or whether the employee has wages paid by another employer.

Example: Mr A and Ms. H are married and file jointly. 

    Ms. H earns $40,000 as a teacher. Mr. A earns $240,000 as    a physician  at a hospital.

They have no other income during the year.

Because Mr. A salary exceeds $200,000, the hospital must withhold an additional 0.9% Medicare tax on the excess wages over the threshold of $200,000 (i.e., the applicable tax is on $40,000, his excess wages over the threshold). 

The total Additional Medicare tax withheld by the employer is $360 ($30,000 × 0.9%). 

Ms. H and Mr. A file jointly, and their combined AGI on their joint income tax return is $280,000, which is$30,000 over the threshold for joint filers (AGI $280,000 - $250,000 MFJ threshold). 

Therefore, their actual Additional Medicare Tax is $270 ($30,000 × 0.9%). 

Assuming they do not owe any other incometaxes, interest, or penalties to which the withholding could be applied, they will receive a $90 ($360 amount withheld - $270 actual tax) refund of the additional 0.9% Medicare tax withholding

Ø Trust Fund Recovery Penalty (TFRP)

· If a business does not deposit its trust fund i.e (Social Security, Medicare, and income tax) taxes in a timely manner, the IRS may assess a trust fund recovery penalty (TFRP).

· The amount of the penalty is equal to the unpaid balance of the trust fund taxes.

 

Compiled By

CA. Harsimran Kaur