Self-Employment and Payroll Taxes - Explained
Taxes assessed against employees
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
What are payroll taxes?
Employers and employees who receive any form of compensation as part of their employment are generally subject to payroll taxes. Payroll taxes were authorized under the Federal Insurance Contribution Act (FICA) and are made up of Social Security and Medicare taxes. Employers must withhold these taxes from the compensation paid to employees. The employer then contributes a similar amount to that withheld from the employees compensation. The employer then deposits these funds with the Internal Revenue Service (IRS). These payments go to fund the Medicare program and the Social Security benefits that the employee will receive when she is eligible.
- Example: I go to work for ABC, Corp. ABC pays me a salary. Each pay period, ABC will withhold an amount of income, Medicare, and Social Security taxes. The Medicare and Social Security taxes are known as payroll taxes. ABC will contribute an amount approximately equal to the amount of payroll taxes withheld from my compensation and then deposit those funds with the IRS.
Next Article: Sole Proprietorships Explained Back to: BUSINESS ENTITIES
Who has to pay Self-Employment Taxes?
Self-employment taxes apply to individuals who are self-employed or are owners of an entity taxed as a partnership. You can think of it as the employer and the employee are one in the same. As such, the self-employed individual is responsible for paying the employer and employee portion of the payroll tax.
- Example: Mary and I form a partnership. We both work in the partnership. As owners of a partnership, we do not receive a salary; rather, we receive compensation by splitting the profits of the business. We are considered self-employed, as we are owners of an entity taxed as a partnership. Mary and I will have to pay self-employment taxes equal to the portion of payroll taxes traditionally paid by an employee and the employer combined.
- Note: An employee must fill out form W-4 to provide necessary withholding information, which is then used to determine the amount of income to withhold. The withheld wages serve to satisfy the employees federal and state income tax obligations. In addition to payroll taxes, the employer will also withhold Federal Unemployment Tax (FUTA) and State Unemployment tax (SUTA) from the employees wages. She deposits all of the taxes withheld at regular intervals with the IRS or state taxing authority.
It is a common scenario where employers wrongfully treat employees as independent contractors. What is the benefit to employers in doing this? What are the detriments to the employee?
Howard and Janet are the sole owner of Searchlight, LLC. Howard and Janet work in the business and Searchlight has one employee, Taylor. Searchlight is taxed as a partnership. What are Howard and Janet's self-employment tax obligations? What are Searchlights payroll tax obligations?
- Howard and Janet are members (owners) of the LLC. As such, they cannot receive a salary. They are compensated by receiving a company draw. The LLC is not required to withhold payroll taxes on Howard and Janet's draw. H and J will, however, have to pay self-employment taxes on the compensation. The LLC is required to withhold and deposit payroll taxes on Taylor's compensation, as Taylor is an employee and not an owner of the company.
- Business Entities (Intro)
- Why is studying business entities important?
- Considerations When Forming a Business Entity
- Holistic (Detailed) Overview of Setting Up a Business Entity
- What are Business Entities?
- What is a Closely-held vs Publicly-held Business?
What are the main types of business entity?
- What are the primary characteristics of business entities?
- What is Creation of a business entity?
- Where to Form a Business
- Incorporating in Delaware
- Forming an LLC in Nevada or Wyoming
- Creating a Company Offshore
- Promoter Liability
- De Jure Corporation
- Ultra Vires
- Brassplate Company
- What is Maintenance of a business entity?
- What is Continuity of a business entity?
- Business Continuity Planning
- Buy Sell Agreements
- Shotgun Clause
- Winding Up
- Dissolving a Foreign Qualification
- What is the Ownership structure of a business entity?
- Joint Stock Company
- Parent Company
- Subsidiary Company
- Wholly-Owned Subsidiary
- State-Owned Enterprise
- Mutual Company
- What is Control of a business entity?
- What is Personal liability of owners of a business entity?
- Entity Theory
- Piercing the Corporate Veil
- What is Compensation of business owners?
- What is Taxation of a business entity?
- What is Sales & Use tax?
- What are payroll and self-employment taxes?
- What are the major characteristics of a Sole proprietorship?
- Uniform Partnership Act
- Uniform Limited Partnership Act
- Partnership Agreement
- At-Will Partnerships
- Responsibilities of Partners to the Partnership
- Silent Partner
- Funding the Partnership
- How are Partners Compensated
- Splitting Equity in an Industrial Partnership
- Terminating the Partnership
- Types of Partnerships
- What are the main characteristics of a General partnership?
- Tort Liability of General Partner
- What are the main characteristics of a Joint venture?
- What are the main characteristics of a Limited partnership?
- Family Limited Partnership
- Master Limited Partnership
- What are the main characteristics of a Limited liability partnership?
- What are the main characteristics of a Limited liability company?
- Forming an LLC
- Articles of Organization
- Operating Agreement or LLC Agreement
- Why You Need an LLC Agreement
- LLC Compensation of Members
- LLC Taxation
- Converting to an LLC
- What are the main characteristics of a Corporation
- Articles of Incorporation
- What to include in the Articles of Incorporation
- Corporate Bylaws
- Exiting the Corporation
- Dissenter's Rights
- What are the requirements to be an S Corporation?
- Non-Profit Organization
- NonProfit Business Entities
- Private Foundation
- A Detailed Explanation of the Sole Proprietorship
- Taxation of Sole Proprietorship
- A Detailed Explanation of the General Partnership
- 50/50 Partnerships: Never a Good Idea
- Publicly-Traded Partnerships
- A Detailed Explanation of the Limited Liability Company
- A Detailed Explanation of the Corporation
- Keepwell Agreement (Letter of Comfort)
- Personal Service Corporation Definition
- A Detailed Explanation of the Non-Profit Entity
- Public Limited Company (UK)