Business Tax Preparation · Business expenses, deductions and credits

Employment taxes

Three separate taxes travel together on a payroll and behave differently. One is matched and capped, one is matched and uncapped, one is not matched at all, and a fourth amount on the same cheque is not the employer’s tax in any sense. Keeping them apart is the whole of the topic.

The rule

FICA on the employee. 6.2 percent of wages for old-age, survivors and disability insurance, and 1.45 percent for hospital insurance, imposed on the income of every individual as a tax on wages received with respect to employment^TY2026 (IRC § 3101(a), (b)(1)). The social security half stops at $184,500 for 2026 — the old-age portion applies only to net earnings up to the contribution and benefit base under section 230 of the Social Security Act, reduced by wages paid to the individual in the year, while the hospital insurance portion has no ceiling^TY2026; the hospital insurance half does not.

FICA on the employer. 6.2 percent of wages for old-age, survivors and disability insurance, and 1.45 percent for hospital insurance, imposed on every employer as an excise tax with respect to having individuals in its employ^TY2026 (IRC § 3111(a), (b)). Same rates, same base, imposed separately.

The additional tax the employer does not match. 0.9 percent on wages above $250,000 on a joint return, half that for a married taxpayer filing separately, and $200,000 in any other case — imposed on the employee alone and not matched by the employer^TY2026 (IRC § 3101(b)(2)).

Federal unemployment tax. 6 percent of the total wages paid during the calendar year with respect to employment, imposed on every employer as an excise tax^TY2026 (IRC § 3301) on $7,000 — wages for this chapter exclude the part of an individual's remuneration paid by an employer during a calendar year after that much has already been paid to them by that employer in the year^TY2026 (IRC § 3306(b)(1)), with where an employer acquires substantially all the property used in a trade or business of a predecessor and immediately employs an individual who worked for the predecessor, remuneration paid by the predecessor that year counts toward the successor's wage base for that individual^TY2026. Against it, a credit for contributions actually paid into a certified state unemployment fund, plus an additional credit bringing the total up to what would have been paid at the higher of the state's highest rate or 5.4 percent — with total credits capped at 90 percent of the tax^TY2026 (IRC § 3302(a), (b), (c)(1)) — but where advances have been made to a state's unemployment account under title XII of the Social Security Act and remain outstanding, the credits otherwise allowable to employers in that state are reduced^TY2026 (IRC § 3302(c)(2)).

Withheld income tax. IRC § 3402(a) requires every employer making payment of wages to deduct and withhold, and the amount is the employee’s tax throughout.

Deductibility. Only the employer’s own share is deductible; federal income taxes including the employee share of FICA and tax withheld at source on wages, federal war profits and excess profits taxes, estate, inheritance, legacy, succession and gift taxes, foreign income taxes where the taxpayer takes the IRC § 901 credit, and real property taxes treated by IRC § 164(d) as imposed on another taxpayer^TY2026 (IRC § 275(a)(1)).

And a personal liability. a person required to collect, truthfully account for and pay over any tax who wilfully fails to do so, or wilfully attempts to evade or defeat it, is liable to a penalty equal to the total amount of the tax evaded, not collected, or not accounted for and paid over^TY2026 (IRC § 6672(a)).

Current figures

How it works in practice

Four amounts, four different characters. On one payroll an employer handles the employee’s withheld income tax, the employee’s FICA, its own FICA, and FUTA. The first two are the employee’s money held in trust; the second two are the employer’s own liabilities. That distinction decides the deduction, decides who is liable if the money is not remitted, and decides how a question about “employment taxes paid” should be answered.

Only one of the FICA components has a ceiling. 6.2 percent of wages for old-age, survivors and disability insurance, and 1.45 percent for hospital insurance, imposed on the income of every individual as a tax on wages received with respect to employment^TY2026 (IRC § 3101). IRC § 3121(a)(1) excludes from wages the remuneration paid above the contribution and benefit base, but only for the old-age, survivors and disability insurance tax — $184,500 for 2026 — the old-age portion applies only to net earnings up to the contribution and benefit base under section 230 of the Social Security Act, reduced by wages paid to the individual in the year, while the hospital insurance portion has no ceiling^TY2026 for 2026. The hospital insurance tax has no base and runs on every dollar of wages.

The additional hospital insurance tax is the employee’s alone. 0.9 percent on wages above $250,000 on a joint return, half that for a married taxpayer filing separately, and $200,000 in any other case — imposed on the employee alone and not matched by the employer^TY2026 (IRC § 3101(b)(2)). Three features distinguish it from everything else on the payroll. It is imposed on the employee only, and IRC § 3111 has no counterpart. Its thresholds depend on filing status, which an employer does not know, so the employer withholds once wages from that employer alone exceed the single threshold and any shortfall or excess is settled on the employee’s own return. And the thresholds have never been indexed.

FUTA looks like a six percent tax and is not. 6 percent of the total wages paid during the calendar year with respect to employment, imposed on every employer as an excise tax^TY2026 (IRC § 3301) applies to $7,000 — wages for this chapter exclude the part of an individual's remuneration paid by an employer during a calendar year after that much has already been paid to them by that employer in the year^TY2026 (IRC § 3306(b)(1)) — a base that has stood at the same figure for decades and is not indexed. Against the tax, a credit for contributions actually paid into a certified state unemployment fund, plus an additional credit bringing the total up to what would have been paid at the higher of the state's highest rate or 5.4 percent — with total credits capped at 90 percent of the tax^TY2026 (IRC § 3302(a), (b), (c)(1)), so an employer that has paid its state contributions on time in a state with no outstanding federal advances pays a small net rate. But where advances have been made to a state's unemployment account under title XII of the Social Security Act and remain outstanding, the credits otherwise allowable to employers in that state are reduced^TY2026 (IRC § 3302(c)(2)): in a credit reduction state the net cost rises, and it rises retrospectively for the whole year because the reduction is determined by the position on 10 November.

The successor rule prevents a restart. where an employer acquires substantially all the property used in a trade or business of a predecessor and immediately employs an individual who worked for the predecessor, remuneration paid by the predecessor that year counts toward the successor's wage base for that individual^TY2026 (IRC § 3306(b)(1)). An employer that buys a business and keeps the staff does not get a fresh wage base for each of them. The same principle applies to the social security base under IRC § 3121(a)(1) for a successor employer, though a mere change of employer without an acquisition does start a new base — which is why an employee with two unrelated jobs can have social security tax withheld above the annual maximum and claim the excess as a credit.

The deduction follows ownership of the liability. federal income taxes including the employee share of FICA and tax withheld at source on wages, federal war profits and excess profits taxes, estate, inheritance, legacy, succession and gift taxes, foreign income taxes where the taxpayer takes the IRC § 901 credit, and real property taxes treated by IRC § 164(d) as imposed on another taxpayer^TY2026 (IRC § 275(a)(1)). The employer deducts its own FICA and its FUTA. It does not deduct the withheld income tax or the employee’s FICA, because those are not its taxes — it deducts the gross wages instead, which already includes them.

And the penalty is personal. a person required to collect, truthfully account for and pay over any tax who wilfully fails to do so, or wilfully attempts to evade or defeat it, is liable to a penalty equal to the total amount of the tax evaded, not collected, or not accounted for and paid over^TY2026 (IRC § 6672(a)). It reaches “any person required to collect, truthfully account for, and pay over” the tax who wilfully fails to do so, which means an officer, a bookkeeper or anyone with authority over which creditors get paid — not the corporation. It is measured by the whole trust fund portion, and incorporation is no protection against it.

How this has changed

None of the rate or base provisions on this page was amended by Pub. L. 119-21. The FUTA rate in IRC § 3301 has read the same since Pub. L. 115-141 tidied its drafting in 2018, and the IRC § 3306(b)(1) wage base has not moved in decades — it is one of the few figures in the Code with no indexing mechanism at all, so its real value falls every year.

The additional hospital insurance tax is the same shape. IRC § 3101(b)(2) applies to wages received in a taxable year beginning after 31 December 2012, and its thresholds are stated as flat dollar amounts with no cost-of-living adjustment. Fourteen years of inflation have therefore brought it to progressively more employees, without any change in the law.

Only the social security base moves, and it moves under section 230 of the Social Security Act rather than under the Code. The Code’s role is IRC § 3121(a)(1), which excludes remuneration above “the contribution and benefit base (as determined under section 230 of the Social Security Act)” — so the figure is published by the Social Security Administration each autumn and is not in a revenue procedure. For 2026 it is $184,500 for 2026 — the old-age portion applies only to net earnings up to the contribution and benefit base under section 230 of the Social Security Act, reduced by wages paid to the individual in the year, while the hospital insurance portion has no ceiling^TY2026.

The practical consequence for a preparer is that this topic changes less than almost any other in Part 2, and that the current-year work is confined to one number.

Exam focus

Separate the four amounts before doing anything else. Employee withheld income tax, employee FICA, employer FICA, FUTA. Questions in this area almost always turn on which of the four the question is asking about.

Know that the wage base applies to the social security component only, that the additional hospital insurance tax is employee-only, and that the employer’s obligation to withhold it starts from a single threshold regardless of the employee’s filing status.

For FUTA, know the statutory rate, the base, and that the credits bring it down to a small net figure except in a credit reduction state.

Finally, know IRC § 6672 as a personal liability measured by the trust fund portion only, and be ready to reject an answer that includes the employer’s own share in it.

Check yourself

1. An employee earns $300,000 in 2026 from one employer. How much additional hospital insurance tax does the employer withhold, and how much does it match?

Answer: It withholds 0.9 percent of $100,000, or $900, because 0.9 percent on wages above $250,000 on a joint return, half that for a married taxpayer filing separately, and $200,000 in any other case — imposed on the employee alone and not matched by the employer^TY2026 requires withholding once wages from that employer exceed the $200,000 figure. It matches nothing: IRC § 3111 imposes no counterpart to IRC § 3101(b)(2).

2. A company buys a business in July and keeps all its employees. Does it get a fresh FUTA wage base for each of them?

Answer: No. where an employer acquires substantially all the property used in a trade or business of a predecessor and immediately employs an individual who worked for the predecessor, remuneration paid by the predecessor that year counts toward the successor's wage base for that individual^TY2026 (IRC § 3306(b)(1)) treats remuneration paid by the predecessor during the calendar year as having been paid by the successor for the purpose of the wage base, where the successor acquired substantially all the property used in the business and immediately employed the individual.

3. An employer remits $50,000 of employer FICA and $70,000 of withheld employee income tax and employee FICA. What may it deduct as a tax?

Answer: $50,000. federal income taxes including the employee share of FICA and tax withheld at source on wages, federal war profits and excess profits taxes, estate, inheritance, legacy, succession and gift taxes, foreign income taxes where the taxpayer takes the IRC § 901 credit, and real property taxes treated by IRC § 164(d) as imposed on another taxpayer^TY2026 (IRC § 275(a)(1)(A) and (C)) names both the employee FICA tax and tax withheld at source. The $70,000 is covered by the deduction for the gross wages from which it was withheld.

4. A corporation fails owing $120,000 of trust fund taxes and $40,000 of its own employer FICA. For how much can a responsible person be assessed under IRC § 6672?

Answer: $120,000. a person required to collect, truthfully account for and pay over any tax who wilfully fails to do so, or wilfully attempts to evade or defeat it, is liable to a penalty equal to the total amount of the tax evaded, not collected, or not accounted for and paid over^TY2026 (IRC § 6672(a)) is measured by the tax the person was required to collect and pay over. The employer’s own share was never collected from anyone and is outside the penalty.

5. Why does an employee with two unrelated employers sometimes pay too much social security tax?

Answer: Because each employer applies the wage base to the wages it pays, and there is no mechanism for them to combine unless one is a successor to the other. The employee recovers the excess as a credit on their own return — the credit arises only where the employee received wages from more than one employer during the calendar year and the combined wages exceed the contribution and benefit base — a single employer that over-withholds must refund the employee and issue a corrected Form W-2 (IRC § 6413(c)(1))^TY2026.