Employee Tax Laws & Regulations

Types

• Employees are required to pay federal income tax, Social Security tax and Medicare tax. The employer withholds these taxes and pays them to the IRS. State employee tax policies vary by state. Most states require employers to withhold state income tax from employees' pay except Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington, Tennessee and Wyoming. The employer may also be required to withhold local and city income tax from employees' wages.
  
  

Federal Taxes

• Employers withhold Social Security tax at 4.2 percent (for 2011) of gross earnings, up to the annual wage limit of $106,800; and Medicare tax at 1.45 percent. It withholds federal income tax according to the employee's W-4 data -- such as filing status, allowances and additional tax to be withheld from each paycheck -- and the IRS Circular E's withholding tax tables. Allowances give the employee a certain sum, which lowers her taxable wages. The Circular E's wage bracket method gives the exact amount of tax to withhold based on the employee's filing status, allowances, taxable wages and pay period.
  
  

State/City/Local Taxes

• If applicable, the employer uses the state revenue agency's policy to withhold state income tax. In many cases, the state requires the employer to use the employee's state withholding allowance/exemption certificate (similar to Form W-4) and the state withholding tax tables to figure the withholding. Some states require the employer to use the employee's W-4 for state purposes. Others may require a flat withholding percentage. Cities, such as New York City and Yonkers, charge a city income tax, and some local governments charge a school district or county income tax. The state revenue agency generally provides the withholding instructions for these taxes.
  
  

Exemptions

• Employees who meet the exempt requirements for federal income tax and state income tax do not pay these taxes. The exempt criteria are included on the W-4 and state withholding allowance/exemption certificate for the appropriate tax year.
  
  

Warning

• Failure to withhold or pay employee tax can result in employer fees, or civil and criminal penalties. Employees who do not adjust their W-4 or state withholding allowance/exemption forms appropriately can end up underpaying or overpaying income tax. If the employee claims more allowances than entitled to, for example, he may owe income tax when he files his tax return. Delinquent taxes can result in the agency attaching a tax lien to the taxpayer's property as collateral for the debt, or imposing a tax levy on the property to recover the debt.
  
  

Tax Filing

• Employers are required to postmark or deliver employees a W-2 showing annual wages paid and taxes withheld by the end of January each year. The IRS requires that employees use the W-2 to file their tax return by the deadline -- April 18 for 2011 and April 15 most other years.