Taxpayers often find themselves owing the IRS even after they have paid for the entire year. This has proven to be very confusing and frustrating for many who already feel they are overpaying. To have control over these types of issues, you must first understand what these taxes are and how they are calculated. Only then will you be able to 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 payroll taxes. These are funds that are withheld from your check every payday. Payroll taxes, by definition, are taxes that both the employer and the employee must pay and are calculated as a percentage of the income paid by their employer. This tax is paid in two different ways. The first way is the funds employers must withhold from your paycheck. The money withheld is used to cover social security, Medicare, income tax and different insurance (unemployment and disability). Payroll tax deductions include the following:

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

• Medicare (1.45%)

• Federal Income (Based on withholding tables see pub. 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 amount or proportional to an employee’s salary. These amounts are also paid to help fund social security as well as other insurance programs and include the same aggregate percentages paid by employees. This is how funds from the Federal Insurance Contribution Act (FICA) 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 are a small business owner or 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 you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of tax withheld from your salary or pension is not enough, or if you receive Income such as interest, dividends, alimony, self-employment income, capital gains, awards, and concessions, you may need to make estimated tax payments If you run a business of your own, you generally need 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 can 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).