Employment Taxes: What They Are, How To Deposit Them, & Penalties For Non-Payment

If you own a company and have employees, you are responsible for paying a variety of taxes at the federal, state, and local levels. You must also withhold certain taxes from the paychecks of your employees.

What Are Employment Taxes?  

Employment taxes include the following. 

1. Federal income tax withholding 

2. Social Security and Medicare taxes 

3. Federal unemployment tax (FUTA) 

Federal Income Taxes/Social Security and Medicare Taxes 

You typically have to withhold federal income tax from wages paid to an employee. You will use Form W-4 to determine the specific amount, although most payroll services or your accountant can do this for you. 

Social security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits for the retired, survivors, and disability insurance distribution provisions of FICA. Medicare tax pays for benefits under the medical care provisions of FICA. As an employer, you are required to withhold a percentage of these taxes from the employee(s) and match the withholding amount. 

Normally, you have to deposit these taxes by check or cash to an authorized financial institution, usually your bank. Check with your tax professional to ensure that you are not required to use the Electronic Federal Tax Payment System (EFTPS). Whatever the payment method, you will be reporting them on Form 941, the Employers Quarterly Federal Tax Return. 

Federal Unemployment Tax (FUTA) 

FUTA is a combined federal and state program that offers unemployment compensation to the unemployed. As a business owner, you are solely responsible for paying this tax, to which, nothing is withheld from the paychecks of your employees. FUTA is determined by using Form 940, however, you may use a tax professional to determine payment amounts. 

Depositing Employment Taxes 

To pay employment taxes, you are required to deposit the money with the IRS. As is common with tax situations, the employment tax payments are not really made to the IRS. Rather, you will need to deposit the employment taxes by using a federal depository. Moving the burden to the private sector, the IRS requires most banks to act as depositories. In case your business just started hiring employees, you may want to ask your bank if they act as a depository. If they don't you might want to consider changing banks. 

To deposit employment taxes, you forward money based on the bank specifications. You will also have to file a Federal Tax Deposit Coupon, Form 8109, together with the deposit. The IRS generally sends these forms to you at the beginning of each calendar year. In the event you don’t receive any, you'll be able to download the form from the IRS site or you can ask your tax professional for it. 

When To Deposit Employment Taxes 

You must deposit employment taxes either once or twice per month. The IRS will be sending you a schedule at the end of every year for the subsequent year. As a general rule, you might want to file within a couple of days of each pay period. 

Failure To Deposit Employment Taxes 

Collecting employment taxes is a high priority of the IRS. Because the taxes include money deducted from an employees paycheck, the IRS sees an employer’s non-payment as a type of theft. If you fail to pay employment taxes, you can expect that the IRS will hunt you down, make it hard on your business, and could even potentially shut it down. In short, make absolutely sure you deposit the employment taxes. 

Penalties For Not Paying Employment Taxes 

If you have employees, you definitely must deduct and withhold various taxes from the paychecks of your employees. Since you are deducting money from employees paycheck, you're handling their funds. This fact is extremely important to the IRS and it puts great emphasis on any failure to pay employment taxes. 

If you don't pay employment taxes, you will be subject to a 100% tax penalty. Yes, 100 percent, called the “trust fund recovery penalty”, the penalty is assessed against the person responsible for paying the taxes, not the entity. The person may be the owner, corporate officer or any other “responsible person.”.  To put it briefly, a business entity does not protect you from the wrath of the IRS. 

Late Payments 

Cash flow crunches are an unavoidable event for pretty much every business. Now, what happens if you make a late payment for employment taxes? Unless you can show an acceptable reason for the delay, the IRS is going to penalize you. 

Late payment penalties vary in amount, dependent upon the delay. If the delay is less than 6 days, the penalty is 2%. Delay for six to 15 days and you will be getting five percent. More than 15 days in delay will push the penalty to 15 percent. In the event you delay this long, the IRS will be peppering you with penalty notices, letting you know where you stand. 

In Closing 

Employment taxes can be frustrating. They are, unfortunately, a necessary evil as your business grows.  Whatever you decide to do, ensure you deposit employment taxes with the IRS in a timely fashion. Take the time to think about the worst thing you have ever heard done by the IRS. If you fail to pay employment taxes, the actions taken by the IRS will likely be ten times worse and you will be the one telling horror stories.