A fringe benefit is defined as compensation other than wages provided to an employee. Common examples include health and life insurance, vacation, employer-provided vehicles, and public transportation subsidies. Fringe benefits may be taxable or non-taxable.

There are generally three types of federal employment taxes:

1. Employee Income Tax Withholding
2. Federal Insurance Contributions Act (FICA)
3. Federal Unemployment Tax Act (FUTA)

Employee Income Tax Withholding is the amount withheld from the employee’s wage to offset their projected annual income tax due to be paid by April 15th of the following year.

The Federal Insurance Contributions Act (FICA) consists of two components commonly referred to as Social Security and Medicare. Strictly speaking, FICA provides for a federal system of old age, survivors, and disability insurance (OASDI) and hospital insurance (HI). The OASDI component is financed through the social security portion of FICA and the HI component (for persons 65 or older) is financed through the medicare portion.

The Federal Unemployment Tax Act (FUTA) was implemented to fund a federal program to provide unemployment compensation benefits to eligible employees who have lost their jobs. The FUTA system does not pay unemployment benefits directly to displaced workers, but rather coordinates the payment of these benefits with each state. Unemployment benefits are paid in compliance with each state’s unemployment compensation laws.

An authorized depository financial institution is a bank that is able to accept federal tax deposits on behalf of an employer.

Employee Only: Each employee is subject to Federal Income Tax (FIT) and files a personal income tax return, IRS Form 1040, at the end of the year. Federal income tax is withheld from each paycheck to offset their federal tax liability.

Employer Only: Each employer is responsible for paying Federal Unemployment Tax (FUTA) on the first $7,000 of annual wages for each employee. The effective FUTA rate is generally 0.8%, subject to certain state unemployment insurance requirements.

Employee and Employer: Both the employee and employer are responsible for FICA tax. FICA is made up of two components, social security and medicare. The effective rate for social security is 6.2% up to the wage base ($106,800 for 2010) and the effective rate for medicare is 1.45% with no limit.

Medicare: The effective tax rate is 2.9 percent of an employee’s wages with no limit. Both the employee and employer are responsible for paying 1.45 percent of the Medicare employment tax. Example 1: For an employee with no prior wages who earns $1,000 during the payroll period, the Medicare withholding from gross pay will equal $14.5 ($1,000 x 1.45%) and the employer portion of Medicare employment tax will equal $14.50 ($1,000 x 1.45%) for a total combined tax due of $29.00. Example 2: For an employee with current year-to-date wages of $600 less than the wage base who earns $1,000 during the payroll period, 100% of the current period earnings are subject to Medicare tax since there is no wage base. Therefore, the amount due the IRS in example 2 is the same as in example 1.