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How to account for Employment Taxes in your Small Business

By Tom Morgan
Filed under: Taxes Income         Words in this Post: 318



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Even if you don’t hire an employee, if you or your spouse is employed by your personal corporation, you will be subject to withholding and employment taxes.

The first type of employment tax is the Social Security and Medicare Tax. Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) program and Medicare’s (HI) program are financed primarily by employment taxes. Tax rates apply to earnings up to a maximum amount of $90,000 in 2005. The current tax rate is 7.65 percent for an individual. This rate is matched by the employer (your corporation, or you, if you are a sole proprietor) so the total tax rate is 15.3 percent of any income you take as an employee. This tax is also colloquially known as the Self- Employment Tax. If you hire an employee, you will deduct 7.65 percent from his or her paycheck and match that with another 7.65 percent. This amount must be remitted to the IRS monthly.

The other employment tax is your basic federal income tax. You must deduct and pay to the IRS the federal income tax per the IRS schedule. (It is available on the IRS website at www.irs.gov. Searching the term income tax schedule will bring up links to the income tax schedules for the current year).

The IRS considers nonpayment of payroll withholding  tax a very serious offense. The fine is 100 percent! If you are more than 30 days late paying the IRS your Social security, Medicare, and income taxes, you would owe the IRS double the amount you failed to pay.

If you live in a state that has a state income tax, you will also need to collect and pay this amount to your state. Other employment taxes you might encounter include state disability tax, unemployment tax, and worker’s compensation tax or mandatory worker’s compensation insurance contributions. Most states offer owners or officers of small employer-owned corporations a waiver from these taxes.

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