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In the next blog post on this topic, we will cover how effective these taxes are, as well as other potential issues they may have. Was this page helpful to you? Thank You! The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work? Contribute to the Tax Foundation Let us know how we can better serve you! We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better? Give Us Feedback
It is unclear in the Order how the deferral rule is supposed to work if an employee's pay may be fluctuating above and below the Maximum Wage Limitation. Notice 2020-65 definitively addresses this question. The Maximum Wage Limitation is separately determined for each employee in each payroll period. While it is nice to have clear guidance on this point, it may be difficult to implement that kind of fluctuating limit within an employer's existing payroll system. Notice 2020-65 offers no options to an employer. Other Legal Concerns There are at least two other tax-related legal concerns that Notice 2020-65 does not address. Internal Revenue Code (the "Code") Section 3102 generally obligates an employer to withhold an employee's social security taxes. If an employer fails to do so, the employer may be held liable for the taxes not withheld, as well various types of penalties. No relief is provided in Notice 2020-65 to an employer that defers payment of an employee's OASDI tax, if the employer cannot collect the deferred taxes later.
See Taxes 101 for additional information about taxes. Social Security and Medicare tax withholding are subtracted from an employee's gross pay by the employer. Known as FICA (Federal Insurance Contributions Act) taxes, they are paid by both the employee and his or her employer. Currently, the following tax percentages that add up to 15. 3% are paid: Social Security: both the employer and the employee pay 6. 20 percent of the employee's gross pay as of 2016 on earnings up to the applicable taxable maximum amount, $118, 500 in 2016. This includes no increase over 2015 as there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2014 to the third quarter of 2015. Note that individuals who are self-employed are responsible for paying the full amount. Medicare: both the employer and the employee pay 1. 45 percent on all earnings with no maximum. (If an individual is self-employed, he or she pays the whole amount. ) Additional Resources for Employers About Payroll Taxes US Business Law and Taxes expert, Jean Murray has put together a comprehensive guide for employers about payroll taxes.
She covers how to calculate taxes, when to pay taxes, forms to use, how to pay taxes, the employer's responsibilities about reporting to the IRS, and more. You'll want to take a look so that you comprehensively understand your legal responsibilities as you pay your employees. Depending on your state and locality, you may check the map by state that is provided by the American Payroll Association. Links are provided to all tax reporting requirements based on your location. Because the US tax laws are so confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions. Also Known As FICA taxes
On August 8, 2020, President Trump issued an Executive Order titled "Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster" (the "Order") [1]. The Order directs the Secretary of the Treasury to permit deferral of employee Old Age, Survivors and Disability Insurance ("OASDI") taxes for payroll dates on and after September 1, 2020 through December 31, 2020. The Order was the subject of a prior Blogpost on August 11, 2020. [2] That Post reviewed many legal and practical concerns associated with attempting to implement the Order. It also emphasized that the Secretary of Treasury was to issue guidance on how to implement the Order. On August 28, 2020, the IRS issued Notice 2020-65 to provide long awaited guidance in relation to the Order. This Post summarizes the guidance in Notice 2020-65, and remaining legal and practical issues pertaining to the Order. IRS Notice 2020-65 As an initial matter, it is important to understand that neither the Order, nor IRS Notice 2020-65, require an employer to defer the payment of employee OASDI taxes.
Things to know about new hire reporting Hiring an independent contractor Independent contractors are paid a sum for work completed, and they are responsible for paying their own taxes. As an employer, you don't withhold taxes or pay unemployment taxes for them. If you convert a contractor into an employee, you'll need to start collecting and paying withholding tax and unemployment tax to the respective agency. You can learn more about the differences between contractors and employees here. If you hire an employee that lives in a state other than where your business is, you may have to pay taxes in both states—the state where your business is located, and the state where your employee lives. You will need to contact both State agencies to find out what taxes you need to pay. You will need to contact both State agencies to find out what taxes you need to pay.