Before you set up your payroll system and hire your first employee, you need to know about the different types of employment taxes.
What are Employment Taxes?
Employment taxes are the taxes that you, your business, and your employees must pay to federal, state, and local agencies. Self-employment tax (Social Security and Medicare tax for self-employed business owners) is also considered an employment tax.
Some taxes, like federal and state withholding, you just withhold from employee pay and turn over to the taxing authority.
Other types of employment taxes, like FICA taxes (for Social Security and Medicare), must be taken from employee pay and also paid by you, the employer. And still others, like unemployment taxes and workers compensation, are your responsibility as an employer, but employees don't contribute to these.
Here's the IRS list of employment taxes, which includes only federal employment taxes. I've included state employment taxes in this article.
Some Employment Taxes are Trust Fund Taxes
Trust fund taxes are taxes withheld from employee paychecks and owed by employees and employers to the IRS and state and local tax authorities. These funds go into your business accounting, but your business doesn't own them.
You must periodically make payments for these taxes to the appropriate federal, state, and local taxing agencies. Keeping and using this money is a common mistake business owners make, and it can get you into trouble with the IRS, especially.
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