All the Types of Employment Taxes

Income Taxes, FICA Taxes, Unemployment Taxes, Workers Compensation

Before you set up your payroll system and hire your first employee, you need to know about the different types of employment taxes.  Some taxes, like federal and state withholding, you just withhold from employee pay and turn over to the taxing authority

Other types of employment taxes, like FICA taxes (for Social Security and Medicare), must be taken from employee pay and also paid by you, the employer.  And still others, like unemployment taxes and workers compensation, are your responsibility as an employer, but employees don't contribute to these.

Here's the IRS list of employment taxes, which includes only federal employment taxes. I've included state employment taxes in this article. 

Trust Fund Taxes: What You Need to Know as an Employer

A reminder that taxes withheld from employees are trust fund taxes; that is, they are kept by you but must be paid when due. 

Federal Income Tax Withholding

All About Employment Taxes
All About Employment Taxes. Comstock Images/Getty Images

All employers are required to withhold federal income tax from employees. The amount of tax is determined by the W-4 form the employee fills out at hire or when the employee has changes in status or wants to change the withholding amount.  You may not pay employees without having a W-4 form on file. More

State Income Tax Withholding

States which have state income taxes require employers to withhold those taxes from employees.  Some states use the federal W-4 form, while other states have their own forms.  Check to see how your state requires state income taxes to be withheld, reported, and paid. More

Social Security and Medicare (FICA Taxes)

All U.S. employers must deduct FICA (Social Security and Medicare) tax amounts from paychecks of all employees, and pay employer and employee portions of this tax. The Social Security employee deduction is 6.2 percent of gross pay up to the annual maximum. The Medicare portion for employees is 1.45 percent with no maximum. Both amounts must be matched by employer contributions. More

Federal and State Unemployment Taxes

Employers are required to pay federal unemployment taxes to provide benefits to employees who have lost their jobs. Employees do not contribute to this tax. Employers contribute based upon their gross payroll (the gross amount paid to all employees).  In addition to federal unemployment taxes, most states require you to participate in the state unemployment tax plan, and to pay unemployment taxes. More

Workers Compensation Benefit Funds

Employers must pay into state-run funds which provide benefits for employees who incur illnesses or injuries because of their work. These benefits are governed by state worker's compensation laws and paid for by employer contributions to state worker's compensation funds. More

Self-employment Taxes

 The IRS considers self-employment taxes in the category of employment taxes. That's because self-employment taxes are like FICA taxes; they are Social Security and Medicare taxes for self-employed individuals. 

The additional Medicare tax is also required for self-employed individuals. 

Self-employment tax is different from other employment taxes because it isn't withheld from employee pay or paid by an employer. This tax is calculated on the net income of a business and paid by the owner on his or her personal tax return.  More