Employment Tax Made Simple

If you’re new to running a business or hiring employees, you may be struggling to wrap your head around employment taxes. If so, you aren’t alone; tax is a complex and often confusing topic, especially when it comes to calculating tax for employees.

However, employment tax doesn’t have to be daunting — in fact, once you understand the basics, it’s relatively straightforward. In this article, we’ll explain what employment tax is, who has to pay it, and how to calculate it.

Ready? Let’s get started.

So, what is employment tax?

In most countries, there is some sort of taxation system in place in order to fund public services. Citizens are required to pay tax on their income and other earnings. Businesses are also taxed, typically in relation to the amount of income they generate.

Employment tax is a particular type of taxation that applies specifically to employees and their wages. It is a levy that is paid by the employee to the government, and it is used to help fund public services. In many countries, employment tax forms a significant portion of the overall tax revenue.

There are a few different types of employment tax. The most common is income tax, which is charged on wages and other forms of income. Another common type of employment tax is social security tax, which helps to fund social welfare programs.

Employers are responsible for deducting employment taxes from employees’ paychecks and sending the money to the government. Employees are also responsible for paying any additional taxes that may be due, such as social security and medicare taxes.

Employment tax can be a bit confusing, but it is important to understand how it works. It is one of the main sources of revenue for most governments, and it helps to fund important public services.

Note: every country will have different tax laws and regulations, so make sure to check your government websites for information specific to your country of tax residence.

How are employment taxes calculated?

Depending on your country of tax residence, you will either have:

• A flat rate on all income, or
• A progressive tax system where the percentage of tax you pay increases as your income rises.

There are also a number of deductions that can be made against your taxable income, including contributions to retirement savings plans or medical insurance premiums.

Employment taxes are typically calculated as a percentage of your salary, and this percentage may vary depending on your income level. In the U.S., for example, there are seven different tax brackets, with the highest tax rate being 37% for those earning above $523,600 per year.

Depending on whether your country implements social security and medical tax, you may need to pay additional tax on behalf of your employees on top of their income percentage. It’s best to check your government website for this information.

Withholding tax: how does it work?

When employers calculate how much tax to keep aside from an employee’s paycheck, they use a table that takes into account the employee’s salary and marital status, among other factors depending on your country of residence.

The tax they end up putting aside is called ‘withholding tax’ and it is paid to the government on the employee’s behalf. Every country has certain parameters around how and when taxes need to be filed and paid, so it’s important to familiarize yourself with the specific rules that apply to you.

In the United States, for example, taxes are typically withheld from employees’ paychecks on a monthly basis. Employers must submit their withholding tax payments every quarter, and an annual summary is also due by January 31st of the following year.

There are a few different ways that employees can receive their withheld taxes back from the government. In some cases, it will be credited directly to their bank account. In others, employees may need to file a tax return in order to receive a refund.

Employment tax nuances

The instructions for employment tax are relatively straightforward: if you have employees that work for you, you have to withhold and pay taxes from their wages. The problem is that there are a lot of exceptions and nuances that can make the process confusing.

• What counts as an employee? Generally speaking, anyone who performs services for you is considered an employee. This includes full-time, part-time, and seasonal workers. It also includes employees you hire through a staffing agency or other intermediary.

There are some exceptions to this rule. For example, independent contractors are not considered employees for tax purposes. This can be tricky to determine, so it’s important to consult with an accountant if you’re not sure.

• What counts as employee income? Employment tax applies to both wages and tips. Tips are considered taxable income, so you need to withhold and pay taxes on them just like you would with regular wages.

Aside from understanding these nuances, it’s always best to consult with a professional in order to make sure you are satisfying the requirements and regulations for your federal, state, and local area.

What can happen if you neglect employment tax?

As with any other business regulation, you must ensure to the best of your ability that you are fulfilling your obligations to employment tax. This means:

1. Registering with your governing body
2. Filing the necessary paperwork
3. Paying your taxes on time
4. Keeping accurate records of all payments and wages
5. Making any filings required by law

If you neglect any of these, there can be serious consequences, including:

• Hefty fines
• Criminal charges
• Seizure of assets
• Closure of your business

It’s definitely worth taking the time to understand and comply with employment tax regulations, as the consequences for not doing so can be extremely costly.

How to keep on top of employment tax

If you fail to withhold and pay the required employment taxes, your business could be subject to penalties — or worse, closure. This would be a devastating outcome for any business, so it’s important to be well-informed about your obligations and take the necessary steps to fulfil them.

The good news is that employment tax is relatively straightforward. What’s more, there are several steps you can take in order to keep on top of things:

• Make sure you’re aware of the different types of employment tax and which apply to your business, as well as how to withhold and pay them (reading this article is an excellent start!)
• Set up a system for tracking and recording payments, deductions and other relevant information. This could involve using a payroll software or good old-fashioned spreadsheets — whichever system works best for you.
• Keep up to date with changes to employment tax law, as these are likely to occur on a regular basis. The best way to do this is by subscribing to an employment tax newsletter or reading relevant articles online.

By following these simple steps, you can ensure that your business is fully compliant with employment tax law and avoid any nasty surprises down the line.

Should you hire a business accountant?

Although taxes can be a simple concept to understand once you’ve been in business for a while, there’s always the chance that you may overlook deductions or credits you’re entitled to.

To be sure that your business is filing the correct paperwork and taking advantage of all tax breaks available, it may be a good idea to consult with an accountant who specializes in small businesses — especially if you’re not particularly savvy when it comes to financial matters.

Accountants can help you with your employment tax by:

• Determining your tax liability and ensuring you’re paying the correct amount
• Filing all necessary paperwork, including employment tax forms
• Advising you on pension plans, health care expenses and other benefits which can be deducted from your taxable income
• Helping you plan for big purchases or investments which could impact your tax liability

The cost of hiring an accountant can be worth it if it means saving on taxes and avoiding costly mistakes. You don’t need to be a large business to benefit from an accountant’s expertise — in fact, many small businesses find that having an accountant is essential to their success.

Tax resources: websites you can refer to

Hopefully, this article gives you a good overview of what employment tax is. However, here are some resources in case you want to learn more:

US and Canada tax information: visit the IRS website at irs.gov or the CRA website at canada.ca

• UK tax information: visit the HMRC website at hmrc.gov.uk
• Australian tax information: visit the ATO website at ato.gov.au
• New Zealand tax information: visit the Inland Revenue website at ird.govt.nz
• Asia-Pacific tax information: visit the PwC website at pwc.com

If these sites do not apply to your country, a quick internet search of “employment tax [country name]” will likely provide you with the information you need.

Final thoughts on employment tax

As a business owner, getting your employment tax right is one of the most important things you can do. However, with all the different rules and regulations, it can be hard to keep track of it all.

Hopefully this article has given you a better understanding of what employment tax is, and how to go about paying it. Tax can be a simple process if you take the time to learn about it.

Remember: there’s no shame in asking for help if you’re unsure about something! It’s better to be safe than sorry, especially when it comes to something as important as your taxes. If you have any questions, don’t hesitate to ask an accountant or tax professional.