Unless you’re a number cruncher, payroll taxes can be tough to understand. In fact, we’ve found that many of our healthcare professionals have the same questions about the topic, so we hope this article will clear up the confusion. Here are the top three things you must know about payroll taxes.
1. You Can’t Avoid Paying Taxes
Whether you’re a W-2 employee or a 1099 independent contractor, you must pay taxes to the Internal Revenue Service (IRS). The main difference between these two classifications is how your taxes are paid.
You pay your taxes incrementally by having your employer withhold a specified amount from every paycheck to submit to the IRS. Therefore, you don’t need to manage your taxes throughout the year. Plus, your employer pays 50% of your FICA taxes (social security and Medicare)—and that’s a very good thing.
1099 Independent Contractors
You’re responsible for managing and paying your taxes in one lump sum at tax time. As an independent contractor, you tend to pay more in taxes overall. First, you must pay 100% of your FICA taxes (social security and Medicare). Secondly, you must manage all your taxes, which can be tricky and cumbersome. If you don’t estimate your taxes correctly each quarter and don’t set enough money aside, you’ll most likely be caught off guard with how much money you owe on your tax bill come April.
2. You're a W-2 Employee
When working with ShiftMed, you’re a W-2 employee, not an independent contractor. Therefore, we withhold the taxes you must pay to the IRS every paycheck. These tax withholdings include:
Social Security Taxes: A flat percentage is deducted from your paycheck based on your taxable income. You pay 50% of this percentage, and we pay the other 50%.
Medicare Taxes: A flat percentage is deducted from your paycheck based on taxable income. You pay 50% of this percentage, and we pay the other 50%.
Federal Income Tax: Deductions are determined by your W-4.
State and Local Income Taxes: Deductions are determined by your W-4 and vary by location.
At the end of the year, we send you a W-2 to file your taxes. A W-2 is a yearly summary of your income and the taxes you paid through payroll.
3. You Determine Your Tax Withholdings
As a W-2 employee, you determine the amount of income tax withheld from your paycheck when you complete your W-4, which occurs during the onboarding process.
A W-4 is an IRS form that tells us, as your employer, what income taxes you want to withhold from your pay. If you believe the tax withholdings on your paychecks are too high or low, you can update your W-4 in our app at any time. You’ll find the form in the ˈBanking & Taxesˈ section of the app.
While we can’t advise you on how to complete your W-4, we’ve provided some resources below to help you navigate the process. Knowing how to fill out your W-4 is important—it can be the difference between receiving a refund or having to pay at tax time.
We hope this article didn’t bore you too much. While most of us hate thinking about (and paying) taxes, it’s essential to understand the topic so you can make the best decision for you.
Investopedia: How to Fill Out Form W-4 in 2022
St Ores Wealth Management: How to Fill Out the IRS Form W-4