If you’ve ever been paid by the hour, then you probably know that the pay you take home is less than what you make hourly. The reason for this is because employers withhold federal taxes. These funds are used to pay for things such as Social Security, Medicare and income taxes.
How does Tax Withholding Work?
When an employee is first hired, the employer is responsible for having them complete the IRS Form W-4. This is a document which allows the employee to decide the amount of tax that they want their employer to withhold, which is dependent on their individual circumstances. Some of these circumstances include the marital status of the employee, as well as whether they have children or more than one job. The W-4 form will determine an employee’s eligibility for tax withholding.
What is Expected from Employers?
Employers are expected to withhold federal taxes from the payment of their employees. This is done for employees that are paid by the hour and by salary. The only exception to this rule is when the employee does not have a tax liability for the previous year, and doesn’t expect to have such a liability by the end of the existing year. The IRS notes that in this scenario, the employee can fill out the Form W-4 instructing their employer not to make any deductions for federal income taxes. There is a section on the form which has instructions for claiming such an exemption. Employers must still withhold money for things such as Medicare and Social Security.
Income Earned through Tips
Some workers, such as waitresses and valets, may earn tips from customers. These payments are considered by the IRS to be standard wages which are taxable. Workers who receive tips are expected to report these payments to their employers, who will in turn report the earnings to the Internal Revenue Service. Employers are also required to withhold additional money from the wages of their employees in order to account for the income they will receive in the form of tips.
Wages Earned from Independent Contractors
Independent contractors are people who are self-employed, who sell their services to customers. They will perform work on behalf of their customers, and will then bill them based on the number of hours they work, or upon the successful completion of the task. Independent contractors are not classified as employees, and therefore businesses don’t have to withhold any of the money they pay them for taxation. The IRS considers independent contractors to be business owners who are responsible for paying their own taxes.
As you can see, with few exceptions, it is mandatory for employers to withhold taxes from the wages of their employees, even tips. These funds are used to pay for a variety of government services, and employees who prefer not to have their income withheld can choose to become independent contractors, where they will be fully responsible for reporting their wages to the Internal Revenue Service themselves. While this provides greater control, it also comes with additional responsibility.