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Payroll Taxes for Corporations
Payroll, or employment taxes, include the following:
- Federal income tax withholding;
- Social Security and Medicare taxes; and
- Federal unemployment (FUTA) tax.
Federal Income Tax Withholding
Your corporation must withhold federal income taxes from its employees' wages. The employee's Form W-4 is used to determine how much federal income tax to withhold from each wages payment. IRS Publication 15 (Circular E, Employer's Tax Guide) is also helpful in making this determination.
Social Security and Medicare Withholding
Social Security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social Security tax pays for the benefits under the old-age, survivors, and disability insurance portion of FICA. Medicare tax pays for benefits under the hospital insurance portion. A portion of this tax is deducted from employees' wages, and your corporation pays a matching amount.
IRS Form 941 (Employer's Quarterly Federal Tax Return) is typically used to report these taxes to the IRS. Links to this form and others related ones can be found in What Are Employment Taxes?
Federal Unemployment (FUTA) Tax
The federal unemployment tax under the Federal Unemployment Tax Act (FUTA) pays unemployment compensation to workers (employees) who lose their jobs. This tax is paid separately from Social Security and Medicare and withheld income tax. FUTA tax is paid solely by the employer.
Federal unemployment tax is reported on IRS Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return) or Form 940-EZ. IRS Publication 15 will let you know which of the forms you should use.
Other Workers (Independent Contractors)
If your corporation uses the services of workers considered independent contractors and not employees, the corporation does not pay employment taxes for those workers, but instead is required to report the payment to the IRS for those services. IRS Form 1099-MISC (Miscellaneous Income) is used to report certain payments made in your business, including payments of $600 or more per year for services performed for your business by workers not treated as your employees. IRS Form 1099 is the form provided to those workers, and can be compared to IRS Form W-2 provided to employees. Be sure to read IRS Advice on Independent Contractors vs. Employees.
