Federal Payroll Tax Guide
Hiring employees is a big step in growing a business. One of the first steps is to be sure you have your Federal Employer's Identification Number (FEIN) on file. It will be required for reporting all taxes you withhold from your employees. To obtain your FEIN number, submit an SS-4 application to the IRS.
The Internal Revenue Service publishes "Circular E" to help guide you through what federal taxes are your responsibility, and which you withhold from your employees' wages.
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Social Security Tax
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One the first taxes that will be withheld from your employees is the the Federal Insurance Contributions Act (FICA). Also known as the Social Security Tax, employers withhold 6.2 percent of their employees' payroll. Employers must also match the 6.2 percent.
Employees may submit a W-5 to you. This is so they may receive an Advanced Earned Income Tax Credit. Low-income working families are qualified to receive a refund of their Social Security tax. While this will not lower the amount of FICA you report, any Advanced Earned Income Tax Credits you pay your employees is deductible from your employer's 941 report.
Medicare
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The Medicare withholding tax was once part of the Social Security withholding tax. It was divided out to help the Federal government identify funding for the Medicare program. Employers withhold 1.45 percent of their employees' gross wages for the Medicare tax. Employers must also match the contribution with an additional 1.45 percent of the gross payroll.
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Federal Income Tax
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Federal income tax is withheld from employees and paid to the IRS. This amount is based on the exemptions an employee claims on his W-4 form. While employers withhold the federal income tax from the paycheck, they do not have to match the income tax when reporting to the IRS.
FUTA
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The Federal Unemployment Tax Act (FUTA) requires that employers pay an additional tax to help support the unemployment insurance from the federal level. These funds are collected for the purpose of off-setting increased unemployment at the state level.
The first $7,000 of wages you pay to an employee every calendar year is assessed with a 6.2 percent FUTA Tax. The tax may be lowered by a credit you receive from your state unemployment program.
Federal Reporting of Withheld Taxes
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There are a number of forms that will have to completed by you and filed throughout the year to report federal payroll taxes. The 941 report is a quarterly statement that recaps all FICA, Medicare, federal withholding and Advanced EIC payments you made throughout the reporting period.
The W-2 is an annual statement recapping gross wages and withholding from your employees. It provides the IRS with accurate information about how much an individual contributed to his personal Social Security account and Medicare fund as well as how much he received from any Advanced EIC payments and any federal income tax was withheld. Employees will use their W-2 to file their personal income taxes.
The annual FUTA report recaps the federal unemployment tax and any credits you received by participating in your state unemployment program.
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References
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