Is an Employer Required to Take Taxes Out of an Employee's Paycheck?
An employer is required to take Social Security and Medicare taxes out of an employee's paycheck. However an employer is not required to take income taxes out of an employee's paycheck if the employee indicates on his W-4 that his withholding status and income projections put him in an income bracket where he will owe no income tax.
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Who Is an Employee?
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The IRS has a set of guidelines for defining the type of work situation that qualifies as an employer-employee relationship. An employer will withhold taxes from an employee's paycheck when appropriate, while an independent contractor will be responsible for paying his own taxes. Because work situations are complex and multifaceted there is no precise way of distinguishing between an employee and an independent contractor, although certain guidelines apply. For example, an independent contractor tends to be responsible for the outcome of a job, such as producing a certain number of units, but he can do the work however he deems suitable, as long as the outcome is acceptable.
Social Security and Medicare Taxes
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Employers must withhold 4.5 percent of an employees wages for Social Security taxes as of 2011, and he must also withhold 1.45 percent of an employee's wages for Medicare taxes. Employees who earn $106,800 annually are not subject to Social Security taxes on earnings in excess of this amount, although employees are subject to Medicare taxes on all earnings.
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Income Tax Withholding
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The amount of income tax that your employer takes out of your paycheck depends on your filing status, as well as the number of exemptions that you claim on your W-4 form. The higher the number of exemptions you claim, the less tax your employer withholds. The number of exemptions you claim should be based on your assessment of variables that are going to affect your total tax liability when you file your income tax return at the end of the year.
Income Tax Reconciliation
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Regardless of the amount of income tax that your employer withholds from your paychecks over the course of the year, your total income tax liability will be based on your total income from all of the jobs that you worked during the year, as well as variables such as whether you have a mortgage. If you instruct your employer to withhold too much, you will receive a refund when you file your federal tax return. If you do not instruct your employer to withhold enough in taxes, you will owe the balance and possibly penalties and interest as well.
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References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
