Are Employers Required to Withhold Taxes on an Hourly Employee

By hrlineup | 02.01.2020

Here is a young employee. They’ve just joined your company on a specific hourly wage. Then they receive their first paycheck, and they are in shock.  That’s pretty much less than what they expected.

Yet that’s what it is, all thanks to employer withholding the law, which requires you to withhold not just different taxes but other payments from the gross pay as well.

But here is the drill, as the employer, you only withhold and remit an amount the employee has declared for withholding in the IRS W-4 form. An employee is required to fill out this form during recruitment. The way they complete that form goes a long way into determining how much you as the employer collects from their paycheck.

How to withhold taxes for employees

All employees, whether full-time or part-time, are subject to payroll taxes. As an employer, you must collect and submit the required taxes to the appropriate state agency, such as the Internal Revenue Service (IRS) and other agencies.

Failing to withhold and remit as required land you hefty fines, payroll tax penalties, and other severe charges for federal income tax not withheld. Who wants that for their business?

You are required to file several employment tax forms each year. Part of this reporting includes the amounts of each tax withheld, which you do quarterly through Form 941. There is also Form 945 for reporting any nonpayroll withholding

In some cases, employers may need to complete the Annual Return of Withheld Federal Income Tax (Form 945) to report any nonpayroll withholding.

Nonpayroll payments are those made to nonemployees such as independent contractors. While the law doesn’t require you to withhold these taxes, in case you do, you must declare them in Form 945. And it’s not just for the federal government; the same applies to their state taxes.

The IRS considers an independent contractor as a business. They are self-employed individuals who sell their expertise to clients. So by no chance is a contractor an employee, even when you pay them on an hourly basis. In terms of filings, you are not expected to withhold such payments. The contractors are responsible for filing and sending their taxes to the IRS. But in any case, you withhold, you should declare them on Form 945.

How to Treat Different Forms Employee Income

As a company or business, all your labor requirements are compensated as either wages or salaries. But there also other forms such as commissions, bonuses, overtime, awards, and tips. All these forms of labor costs are subject to various taxes at different levels of the government. Three federal taxes always suffice; they include income tax, Social Security tax, and the Medicare tax.

Your employees, particularly those who directly interact with customers, may receive tips from your customers. According to the IRS, this tip income, commissions, bonuses, and all other extra income related to the job are taxable wages. So your employees must report all their tip income to you, and the IRS, in turn, requires you to withhold extra money from the employee’s wages to account for this tip income.

So, back to the question, are employers required to withhold taxes on an hourly employee? Yes, they do, but only what the employee has declared on the W-4 form.