IRS Payroll Tax Guide

Employers must give employees a W-2 showing annual wages and taxes withheld.

The Internal Revenue Service (IRS) is the organization responsible for administrating and enforcing the United States' federal tax laws, including payroll taxes. Both the employer and the employee have payroll tax obligations

Withholding

The employee must pay federal income tax, Social Security tax and Medicare tax via payroll withholding. This means that the employer deducts the applicable amounts from the employee's wages. The employer uses the employee's W-4 form and the IRS withholding tax tables to figure federal income tax. It figures Social Security and Medicare taxes at flat percentages of 6.2 percent and 1.45 percent of gross income, respectively.

Employer Tax

The employer is responsible for paying matching portions of Social Security and Medicare tax. Specifically, it pays an equal portion of the amount withheld for each employee.

The employer alone is responsible for paying federal unemployment (FUTA) tax. The FUTA rate is 6.2 percent of the initial $7,000 paid to each employee as of August 2010. If the employer has paid state unemployment taxes appropriately, it can take the maximum FUTA credit of 5.4 percent. This makes the FUTA rate 0.8 percent.

Considerations

The IRS provides the employer and the employee with guides to ensure payroll tax compliance. The employer should use IRS Circular E as its main payroll tax resource. The employee can use IRS Publication 919 to learn how to appropriately adjust its federal income tax withholding.

References

• IRS: 2010 Circular E
• Social Security Administration: Social Security & Medicare Tax Rates
• IRS: The Agency, its Mission and Statutory Authority

Resources

• 2010 Circular E
• Publication 919