Payroll Taxes: What the Employee Pays and What the Employer Pays

Employee paid taxes include federal income tax, Social Security and Medicare (FICA) taxes, and state and local income taxes.

Employer paid taxes include  federal unemployment tax, state unemployment insurance,  and Social Security and Medicare (FICA) taxes.  In addition, the employer must remit all taxes withheld from employees.

Employee Versus Independent Contractor

The IRS makes important distinctions between these classifications so that Social Security, Medicare, unemployment and incomes taxes are paid correctly.  Classifications also affect how business and individual tax returns are filed, so this is a crucial area to handle right.

Determining a person's status comes down to facts in three main categories: behavioral control, financial control and the relationship of the parties.  

Behavioral control deals with the amount of instructions a person receives on how, when or where to do the work.  It also considers the amount of training a person receives from the business about what should be done and the use of required procedures and methods.  More extensive instructions and training suggests that a person may be an employee, and conversely, less of these may mean a person is an independent contractor.

Financial control shows whether there is a right to control the business part of the work.  If someone has a significant investment in their work and are not reimbursed for some or all business expenses, then they may be an independent contractor.  Also, if someone has the chance to realize a profit or loss, this suggests they are in business for themselves and that they may be an independent contractor.

Relationship of the parties looks at how the business and the worker perceive their relationship.  If a person receives insurance, pension or paid leave benefits, this indicates that they may be an employee.  A written contract may determine the relationship as it outlines what is intended from both the worker and the business.


Here are some things to help you as you work with your payroll.

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