What Is Employment Tax Liability for Employers?
Grasp the full scope of employment tax liability. Understand your duties as an employer to ensure accurate tax handling and compliance.
Employment tax liability refers to the tax responsibilities businesses hold concerning their employees. It involves collecting, withholding, and remitting specific taxes to federal, state, and sometimes local government authorities. Employer compliance is a fundamental aspect of operating a business with employees.
Understanding Different Employment Taxes
Employers are responsible for several types of employment taxes. Federal Insurance Contributions Act (FICA) taxes include Social Security and Medicare taxes, which fund retirement, disability, survivor benefits, and hospital insurance. For 2025, the Social Security tax rate is 6.2% for both employer and employee, applied to wages up to the annual wage base limit of $176,100. Medicare tax is 1.45% for both employer and employee, applied to all wages with no wage base limit. An Additional Medicare Tax of 0.9% applies to employee wages exceeding $200,000.
The Federal Unemployment Tax Act (FUTA) tax is paid solely by the employer to fund unemployment benefits. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages, though most employers qualify for a credit that reduces the effective rate to 0.6% if state unemployment taxes are paid on time. Employers also withhold federal income tax from employee wages based on Form W-4 and IRS withholding tables.
State-level employment taxes also add to an employer’s liability. State Unemployment Tax Act (SUTA) taxes, similar to FUTA, fund state unemployment insurance programs and are employer-paid. SUTA rates vary by state and are experience-rated, meaning a business’s unemployment claims history can influence its specific rate. Many states and some local jurisdictions also require employers to withhold state and local income taxes from employee wages.
Determining Taxable Wages
Understanding taxable wages is essential for accurate employment tax calculations. Taxable wages include all remuneration for services performed by an employee. This covers compensation such as regular salaries, hourly pay, commissions, and bonuses.
Other forms of compensation included in taxable wages are tips reported by employees, certain non-cash fringe benefits like personal use of a company vehicle, and severance pay. Reimbursements for employee business expenses not accounted for to the employer, or exceeding IRS-approved per diem rates, are also taxable wages.
Certain deductions or benefits reduce wages subject to specific taxes. Pre-tax contributions to qualified retirement plans, such as 401(k)s, reduce wages subject to federal income tax withholding and Social Security and Medicare taxes. Health insurance premiums paid under a cafeteria plan or qualified transportation benefits can be excluded from taxable wages for some or all employment taxes.
Calculating and Withholding Tax Amounts
Calculating employment tax amounts involves applying specific rates and wage bases to an employee’s taxable wages. For FICA taxes, employers calculate both employer and employee portions of Social Security and Medicare taxes. The Social Security portion is 6.2% for each party on wages up to the $176,100 wage base for 2025, while Medicare is 1.45% for each on all wages. If an employee’s annual wages exceed $200,000, the employer must also withhold an additional 0.9% in Medicare tax from the employee’s wages.
FUTA tax calculation is based on the first $7,000 of an employee’s wages at a 6.0% rate. However, employers can claim a credit of up to 5.4% for timely state unemployment tax payments, reducing the effective FUTA rate to 0.6%. State Unemployment Tax Act (SUTA) tax calculations vary by state, with rates based on an employer’s experience rating and taxable wage base.
Federal income tax withholding amounts are determined using the employee’s Form W-4 and IRS withholding tables. These account for the employee’s filing status, number of dependents, and any additional withholding requests. The employer’s total employment tax liability includes their share of FICA, FUTA, and SUTA taxes, plus FICA and income taxes withheld from employee wages.
Reporting and Payment Obligations
After calculating and withholding employment taxes, employers must meet specific reporting and payment requirements. Federal employment taxes, including withheld income tax and FICA taxes, are reported quarterly on Form 941, Employer’s Quarterly Federal Tax Return. Federal Unemployment Tax Act (FUTA) liabilities are reported annually on Form 940, Employer’s Annual Federal Unemployment Tax Return.
Payment of federal employment taxes is made through the Electronic Federal Tax Payment System (EFTPS). Deposit frequency depends on tax liability, with schedules ranging from daily to monthly or semi-weekly. These tax deposits are separate from quarterly or annual return filings.
State unemployment and income tax withholding obligations involve state-specific forms and payment schedules. These vary by state, requiring separate periodic returns and payments to the state tax agency. At year-end, employers must provide employees with Form W-2, Wage and Tax Statement, showing wages and withheld taxes. Form W-3, Transmittal of Wage and Tax Statements, summarizing all W-2s, must also be filed with the Social Security Administration.