Payroll Taxes for Employees

If an individual is an employee, the employer must withhold payroll taxes, including federal and state income taxes.  The amount withheld depends on the amount of wages paid, the filing status (i.e. single or married), the number of pay periods, and the number of allowances claimed by the employee.  Each employee is required to give the employer a signed Form W-4 that indicates the filing status and number of personal allowances claimed.  The employee completes a worksheet provided with Form W-4, to assist with the computation of the correct number of personal allowances.  An employee can claim fewer personal allowances but cannot claim more because the employee will be underpaid and subject to underpayment penalties.

Social Security Taxes

Both the employer and employee are required to pay social security taxes.  The employer pays 6.2% of the taxable wage base and withholds 6.2% of a fixed taxable wage base from the employee.  Both the employer and employee are also required to pay Medicare taxes.  The employer pays 1.45% of wages and the employer withholds another 1.45% from the employee.  Wages for social security purposes include 401(k) contributions and deferred compensation.

Unemployment Taxes

Employers also must pay federal and, where applicable, state unemployment taxes.  The tax applies to the first $7,000 of wages paid to each employee.  For state unemployment taxes, the rate of tax and wage base will differ from state to state.  However, an employer can take a credit against federal unemployment for amounts paid to state unemployment funds up to fixed percentage of taxable wages.

Form W2

Employers are required to provide each employee with a Form W2, which is an annual summary of wages paid, and taxes withheld.  The employer also files Forms W2 with the Internal Revenue Service and state taxing departments.  The form is due to the employee by January 31 of the year following that for which income taxes will be filed, so for employees filing income taxes for 2004, employers must provide a Form W2 by January 31, 2005.