Whether you plan to start a business with employees or you are currently operating a business with employees, you need to know your tax responsibilities as an employer.

If you have employees, you are responsible for several federal, state and local taxes. As an employer, you must withhold Federal income tax withholding, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.

The form of business you operate determines what taxes you must pay and how you pay them.

There are four general types of business taxes:

  • Income tax
  • Self-employment tax
  • Employment taxes
  • Excise tax

Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Self-Employment Tax

Self-employment tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits and hospital insurance (Medicare) benefits.

Employment Taxes

When you have employees, you, as the employer, have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

  • Social Security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

Generally, an employee is anyone who performs services for you if you can control what will be done and how it will be done.

Excise Tax

You may need to pay excise taxes if you do any of the following:

  • Manufacture or sell certain products
  • Operate certain kinds of businesses
  • Use various kinds of equipment, facilities or products
  • Receive payment for certain services

Depositing Taxes

In general, you must deposit income tax withheld and both the employer and employee shares of Social Security and Medicare taxes. You can make your deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking your deposit and Form 8109-B, Federal Tax Deposit Coupon to an authorized financial institution or a Federal Reserve bank serving your area. However, some taxpayers are required to make deposits using the EFTPS.

Outsourcing Payroll Duties

Many employers outsource some of their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and greatly streamline business operations. But employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of Social Security and Medicare taxes.

Recordkeeping for Employers

Keep all records of employment taxes for at least four years. Also, keep good records for your business to help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns and support items reported on tax returns.

Questions for Your Attorney

  • Do I have to pay excise taxes?
  • Am I required to deposit income tax using EFTPS?
  • I haven't kept good records of my employment taxes, what should I do? Will I get in trouble?