The difference between employment tax and estimated taxes

Often, taxpayers find themselves owing the IRS even after paying for the entire year. This has proven to be very confusing and frustrating for many who already feel they are paying too much. To gain control over these types of issues, you must first understand what these taxes are and how they are calculated. Only then can you order the required payments in a way that produces the desired tax outcome.

If you work as a W-2 employee, you generally must remit employment taxes. These are funds that are withheld from your check on each payday. Payroll taxes, by definition, are taxes that both the employer and employee must pay and are calculated as a percentage of the income paid by your employer. This tax is paid in two different ways. The first way is the funds employers are required to withhold from your paycheck. The money withheld is used to cover social security, Medicare, income tax and different insurances (unemployment and disability). Payroll tax deductions include the following:

• Social Security withholding (6.2% until reaching the annual maximum)

• Medicare (1.45%)

• Federal Income (Based on withholding tables, see publication 15, irs.gov.)

• Additional Medicare (0.9% for income over $200k)

The second way that payroll tax is paid comes directly from the employer. Employers are required to pay a fixed or proportional amount to an employee’s salary. These amounts are also paid to help finance social security as well as other insurance programs and include the same added percentages paid by employees. This is how Federal Insurance Contribution Act (FICA) funds are paid. FICA is made up of Social Security and Medicare. The worker pays half and the employer pays half to reach 15.3% of the tax liability on wages.

If you own a small business or work as an independent contractor, you may have to pay your Medicare and Social Security (self-employment) obligation through estimated tax payments throughout the year. The IRS states: “Taxes must be paid as income is earned or received during the year, either through withholding or estimated tax payments. If the amount of tax withheld from your wages or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and concessions, you may be required to make estimated tax payments.If you are in business for yourself, you are generally required to make estimated tax payments. not just income tax, but other taxes like self-employment tax and alternative minimum tax.If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You may also be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return” (irs.gov., pub. 505, tax withholding and estimated tax).