Under federal law, employers are required to withhold certain employment taxes from their employees’ paychecks and then forward the amounts withheld to the Internal Revenue Service (IRS).
The employment taxes that employers are required to withhold are:
The Social Security and Medicare taxes withheld are denominated as “FICA” deductions. “FICA” is an acronym for “Federal Insurance Contributions Act.” The Federal Insurance Contributions Act is simply a federal law that sets out the rules for how the federal government should collect payroll, or employment, taxes and steer them into the Social Security and Medicare programs.
If a person lives in a state that imposes an income tax — and 43 of the 50 states do — then the employer is also required to withhold amounts for the payment of state income taxes. Specifically, 32 states impose a graduated-rate individual income tax that is like the federal income tax.
Nine states have a flat income tax or some other alternative tax structure. Only seven states do not have any income tax whatsoever and they are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. So in those states, an employer would not have to withhold state income tax. In all other states, an employer would most likely have to withhold state income tax and possibly other employee contributions to state revenue.
In addition, a person may live in a county or city that collects income taxes from its residents. If this is the case, then a person’s employer may have an additional duty to withhold county or municipal income taxes from the person’s paycheck.
Federal Income Tax
Federal income tax is collected on a pay-as-you-go basis. This means that the taxes are collected through employer paycheck withholdings as their employees earn their wages and salaries. This results in the taxes being taken out of employees’ paychecks whenever they are distributed. Of course, people who are self-employed must pay quarterly withholdings of the estimated tax on their earned income using the 1040ES form. They must do this themselves.
Social Security Taxes
Social Security taxes are used to pay for the Social Security benefits of older individuals who no longer work but paid into the system while they worked, survivors of individuals who used to work and paid into the system, and those who have disabilities that prevent them from working. An employee contributes a percentage of their income to Social Security, and their employer then matches the amount paid by the employee.
Medicare taxes are one of the sources of funding for the federal Medicare program. Medicare is the federal health insurance program for people who are 65 and older. It also covers some younger people who have been deemed disabled by the SSA and people with end-stage renal disease and ALS, or Lou Gehrig’s disease. The Medicare program was begun in 1965 and the Centers for Medicare and Medicaid Services (CMS) now administers the program.
The Medicare tax rate is 2.9% in 2022. Typically, a person is responsible for paying half of this amount, or 1.45% of their income, while their employer is responsible for paying the other half.
What Are My Employer’s Responsibilities?
Both an employee and their employer are responsible for ensuring that the employee’s employment taxes are paid. In particular, an employer must report an employee’s income and the employment taxes that are withheld from employees. The employer must then forward payment of these taxes appropriately.
An employer must make all federal tax deposits via an electronic funds transfer (ETF). Generally, an EFT is made using an electronic funds transfer payment system (EFTPS), which is a free service of the Department of the Treasury. If an employer does not wish to use EFTPS, other arrangements for electronic deposits can be made.
There are two deposit schedules available to an employer, monthly and semi weekly, for making federal employment tax deposits. These schedules tell an employer the deadline for making the deposit of the amounts withheld after the tax liability arises. When the tax liability arises depends on the dates the employer made payments or paid wages.
Penalties may apply if an employer does not make required deposits on time, or if they make deposits for less than the amount that is required by law. The penalties do not apply if the proper and timely deposit was not made due to a reasonable cause and not to willful neglect.
If an employer receives a penalty notice, they have the opportunity to provide an explanation of why they believe they had reasonable cause to delay payment.
Bear in mind that employer responsibilities may vary according to state law. For instance, employer’s responsibilities under California employment tax laws may be subject to special requirements when it comes to independent contractors. An employer should always consult with an attorney if they have specific questions about any state employment tax withholding laws in their state.
What Are My Responsibilities As an Employee?
As an employee, a person is responsible for the payment of their employment taxes. While most employers withhold taxes on behalf of their employees, an employee is technically responsible for making sure their taxes are collected and paid if their employer were not to do it for them.
Even if a person’s employer withholds taxes for them, they are responsible for assisting the employer in determining the correct amount to withhold. They have a duty to inform their employer through the IRS Form W-4 of their filing status, whether they are married or single and how many exemptions they claim. The IRS Form W-4 is the tax form completed by an employee and provided to their employer to indicate basic information about their tax status. The W-4 form aids the employer in determining the correct amount of federal tax to withhold from an employee’s paycheck.
Of course, if a person’s employer does not withhold a sufficient amount in taxes from a person’s paycheck, then when the person files their income tax return in the following year, they may have to pay additional taxes. On the other hand, if the employer has withheld too much, the person may receive a refund after filing their income tax return in the following year.
If a person finds out that their paycheck withholdings are inaccurate for several years, either too high or too low, they would want to consult their Human Resources department to learn how to correct their withholdings and make them better match their actual income tax liability.
What Should I Do If My Employer Has Not Collected or Paid My Employment Taxes?
If a person’s employer does not withhold their taxes, it may be up to the person to ensure that federal income tax withholdings are paid properly. In addition, if a person’s employer did withhold employment taxes but did not forward them to the IRS as required by law, the employer may be guilty of employment tax evasion. They may be penalized by having to pay fines and, in extreme cases, by a term of imprisonment.
If an employer does not collect or pay an employee’s federal tax withholdings, the employee has the option of going to the IRS and reporting them. Reporting their employer prevents the employee from getting in trouble for tax non-payment in the future. However, the IRS is also going to ask the employee to pay the taxes they owe, and it does not matter that the employer should have withheld them. The employee should be prepared to pay the taxes that they owe.
However, if a person’s employer did not pay their Social Security and Medicare taxes, the employee is not responsible for those taxes. The employer would have to pay the back taxes owed, as well as any fines and penalties.
An employee can notify the IRS about the situation by filling out an IRS Form SS-8, which notifies your employer about withholding the proper taxes. There is no way to remain anonymous, however, and your employer is going to know the identity of an employee who reported them to the IRS.
Do I Need a Lawyer for Help with an Employment Tax Problem?
If you are an employer and have questions about complying with federal tax law regarding paycheck withholdings for your employees, a tax lawyer can answer your questions and provide guidance.
If you have fallen out of compliance and are worried about the possible consequences, you need to consult a tax lawyer promptly for advice as to how to solve the problem. Your tax lawyer is able to work with the IRS to resolve the problem and minimize the consequences for you.
If you are an employee and believe that your employer may not be withholding your employment taxes properly, or possibly not at all, you too need to consult a tax lawyer. Your lawyer can help you communicate about your concerns with your employer and make sure that you comply with your tax obligations regardless of what your employer does.