There are two types of employee-related taxes:
- Taxes paid by the employer (employer taxes)
- Employee taxes withheld by the employer (withheld taxes)
While the employer pays these taxes to the IRS, note that employee taxes actually come out of the employees salary or wages. Most employers deposit these amounts with a bank every month. Once every three months, the employer reports on IRS Form 941 the amounts paid and withheld to the IRS.
The employer taxes come from the business income. Employer taxes include the employer’s share of Social Security and Medicare, as well as an amount for federal unemployment taxes.
Self-employed business owners do not have the same tax liabilities—such as Medicare and Social Security—as a business’s employee. Instead, self-employed persons must pay the self-employment tax, which amounts to the combined portion of taxes for employees. Self-employed individuals report their taxes on Form 1040 under the “Other Taxes” category. In addition, self-employed people must also file quarterly estimated tax payments for both their individual income and self-employment taxes. When they file their annual income tax returns, if they have not paid enough estimated tax, they may have to pay a penalty to the IRS.