Withholding Taxes

• According to the IRS, employees are required to pay federal income tax, Medicare tax and Social Security tax; these are referred to as federal withholding. The employee's W-4 form, specifically his filing status and allowances, and the IRS withholding tax tables (Circular E) dictate the amount of federal income tax the employee pays.
  
  All employees, except some nonimmigrants and nonresident aliens, must pay Social Security and Medicare tax. The former's taxes are withheld at 6.2 percent of gross earnings, up to $106,800 annually; the latter's are withheld at 1.45 percent of all gross compensation. If the state charges state income tax, the employer must withhold it.
  
  

Employer Taxes

• The employer must pay a matching amount of Social Security tax (6.2 percent) and Medicare tax (1.45 percent). Furthermore, it pays federal unemployment (FUTA) tax and state unemployment (SUTA) tax. FUTA tax is calculated at 6.2 percent of wages, up to the first $7,000 paid to each worker. The employer is allowed to take a credit of up to 5.4 percent against its FUTA tax if it paid all its state unemployment taxes (in which case, the FUTA tax rate is 0.8 percent). The employer must check its state's guidelines to know the state tax rate and wage base to calculate its SUTA tax.
  
  

Reporting

• The employer reports all its Social Security, Medicare and federal income tax liabilities to the IRS via Form 941 (Quarterly Tax Return). The employer reports FUTA tax liabilities via Form 940 (Annual Tax Return) and files reports with the appropriate state agency quarterly. It reports employee federal and state annual withholding on employees' W-2 forms. It files the W-2 forms with the Social Security Administration and with the respective state agency.
  
  

Payment

• The employer is responsible for paying federal and state tax withholding and its own portion of taxes to the government. It pays Social Security, Medicare and federal income tax to the IRS, typically on a semiweekly or monthly basis. But, in some cases, such as when the federal tax liability is less than $2,500, the employer can pay the liabilities with its quarterly tax return.
  
  

Considerations

• If the employee fails to file her tax return on time, she can incur a late-filing penalty of 5 percent of the tax due for each month or part of a month that the return is tardy, for up to five months. Unpaid taxes are subject to interest, which is based on the federal short-term rate plus 3 percent, until all monies owed are paid. According to the IRS, interest is added daily. The employer can face penalties for not furnishing employees with correct or timely W-2 forms and for not making its tax deposits on time or properly.