Employer Income Tax Withholding: The Basics

If you have recently changed jobs, you’re probably familiar with the W-4 form, where you declare how many exemptions you have, for things like having dependent children, being married, or holding multiple jobs. These allowances are meant to offset the amount of tax withheld, based on approximately how much tax you will be able to deduct.

It is this withholding of taxes out of your paycheck that makes tax refunds possible every spring — the government isn’t actually paying you (unless you live in Alaska, make a small enough income to be eligible for the Earned Income Tax Credit, or have had devastating financial losses over the past year), but rather returning your money that you have already set aside for taxes and didn’t turn out to owe.

Employers, however, also participate in tax withholding, for the taxes that both you and your employer pay: the social security, Medicare and disability taxes.  These taxes are assessed both against the employer and the employee (unless you’re self-employed, in which case you will need to pay the share that would have come from employer income tax withholding as well), and are generally not subject to deductions or exemptions like the basic income tax is.

These withholdings are based on the employee’s pre-tax income. For Social Security, the employee and employer income tax withholdings are each 6.2%, on the first $127,200 earned by each employee. The Medicare withholding is 1.45% each for the employer and employee on the first $200,000 — but after that, the employer withholding increases to 2.35%.

Another important difference between your personal income taxes and employer income tax withholding is that the employer has to pay every month, or every two weeks, based on the size of the company and its relative tax liability.  Also, the deposits must be filed electronically, through the corporate account with the IRS.

As one might expect with the IRS, the penalties for late payment can be severe too – up to 15% of payroll, if the payment is more than 10 days late – making a financial professional or accountant an even more important asset!

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