Payroll Tax Rates and Forms

FICA Tax Liability

FICA taxes include Social Security (OASDI) and Medicare. The Social Security tax rate applies only to wages paid within a Social Security wage base ($113,700 in 2013). There is no cap on wages subject to the Medicare tax.

If you are required to pay payroll taxes on your employee's paycheck, the FICA tax rate that you'll pay (employer-share) is 7.65 percent of the employee's paycheck, and you should withhold 7.65 percent of pay from the amount you give your employee (employee-share) up to the wage base. Once the wage base is reached, both the employer-share and the employer share is 1.45 percent on the full amount of compensation. You may choose to pay your employee's portion of the tax, if you wish.

Additional 0.9 Percent Medicare Tax Starts in 2013. Beginning in 2013, the employee’s portion of the Medicare tax is increased by an additional 0.9 percent (from 1.45 percent to 2.35 percent) on earning over $200,000 ($250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing separately). In the case of a joint return, the additional tax is imposed on the couple’s combined wages. Although the employer is generally required to withhold the employee's portion from the employee's wages, the employer is not obligated to withhold the additional tax unless the employee receives wages from the employer in excess of $200,000, regardless of whether the employee is married or single.

Federal Unemployment Taxes

You will also have to pay federal unemployment taxes on the first $7,000 of your employee's wages. Multiply the portion of the wages that you paid by .006. Be sure to check with your state department of labor for the rules on state unemployment tax, since you will generally have to pay that tax as well.

Household Employees

If you are required to pay employment taxes on domestic help, you can pay them along with your regular income tax on Form 1040. However, you will need to complete Schedule H, Household Employment Taxes, and attach it to your tax return. You can call 1-800-TAX-FORM or go to the IRS website to get a copy of this form and its instructions, which will walk you through the procedures for completing the form. Also ask for a copy of IRS Publication 926, Household Employer's Tax Guide, which explains more about the responsibilities of employers, including the need to file annual W-2 forms for each employee.

Planning Tools You can download Schedule H to aid in your financial planning.

You don't have to withhold income tax from your household employee's paycheck unless you want to. However, you may have to pay an estimated tax penalty if your total tax bill, including taxes on household workers, is over $1,000 more than the tax you prepaid throughout the year through estimated tax payments or payroll withholding. To avoid this penalty, it's generally necessary to estimate the household taxes you'll be liable for during the year, and use your estimate to increase the withholding amount on any paychecks you receive, or add the amount to your quarterly estimated tax payments during the year.