Employment taxes are often the bane of small business owners. They are the normal functions of large payroll departments and they are often misunderstood by employees.

Employment taxes are the tithe that must be paid to satisfy the requirements of Federal, State, and sometimes even local requirements. They are the bane of small business owners when they first hire an employee because of the complicated and detailed record keeping involved and the amount of paperwork required. In some cases, the employer is responsible for the tax. In other cases, the employer shares the burden with the employee. In the case of income taxes, the employer is merely obligated to withhold the entire amount from the employees pay and deposit and report it in a timely manner.

The major employment tax is Federal or State income taxes. This tax is calculated using information provided by the employee's W-4 form and following the guidelines in IRS Publication 15 and 15-A, the Employers Tax Guide and the Employers Supplemental Tax Guide. The State income tax, if applicable, is calculated in a similar manner. The taxes are withheld from the employee and must be deposited in a bank or financial institution that accepts tax deposits for the Government, and reported on IRS Form 941, Employees Quarterly Federal Tax Return.

The taxes mandated under the Federal Insurance Contributions Act (FICA) include Social Security taxes and Medicare Taxes. These taxes are shared on a 50-50 basis between the employer and the employee. Many employees are not aware that the employer is contributing as much to their FICA taxes as they are themselves. This is a hidden cost of employment that increases payroll. Another such tax is the FUTA tax. This is the Federal Unemployment Tax and it is paid entirely by the employer to provide funds for unemployment compensation.

The calculation and reporting of Employment taxes is normally done by the payroll departments of larger business concerns, but small business owners often find themselves struggling with the process. When a firm does not have an accountant that handles tax issues, this is often a serious problem for the owner. There are now many good business software programs available to assist in the preparation of payroll and the calculation of payroll taxes.

Common problems with Employment Taxes include poor record keeping and failure to handle deposits and reports in a timely manner. The IRS and the State taxation departments are not very lenient with employers who fail to report employment taxes when they are due and penalties can be levied against the employer for failure to do so. Although employees typically bemoan the large chunk taken from their take home pay, they usually do not realize the expense and the hassle of the employer in dealing with Employment taxes.


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