Final answer:
Businesses must withhold federal income tax from employees' total earnings, a requirement that comes from the Revenue Act of 1942. This withholding includes deductions for Social Security and Medicare. Self-employed individuals are responsible for both the employee and employer portions of these taxes.
Step-by-step explanation:
Do Businesses Have to Withhold Federal Income Tax?
Yes, businesses are required to withhold federal income tax from an employee's total earnings. This system was solidified by the Revenue Act of 1942, which mandated employers to withhold taxes from workers' paychecks, making tax collection more efficient. Employees see specific amounts deducted for Social Security and Medicare from their earnings, while employers also contribute to these payroll taxes. However, these employer contributions are often indirectly passed back to employees in the form of lower wages. Self-employed individuals or those in the "gig economy" receiving a 1099 form must pay both the employee and employer portion of the payroll tax.
The type of tax a business pays, including income tax, employment tax, unemployment compensation, social security insurance, and excise tax, depends on its structure. Furthermore, payroll taxes are also split between the employer and the employee, with the employee generally seeing 6.2% of income earned below $113,000 deducted for Social Security and 1.45% for Medicare from their paychecks. Businesses must report these taxes quarterly or annually, depending on jurisdiction rules.