Often, taxpayers find themselves owing the IRS even after they’ve paid for the entire year. This has proven to be very confusing and frustrating for many who already feel they pay too much. To gain 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 result.

If you work as a W-2 employee, you generally must remit payroll taxes. These are funds that are withheld from your check each 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 your employer. This tax is paid in two different ways. The first form is the funds employers must withhold from your paycheck. The money withheld is used to cover social security, Medicare, income tax, and various insurances (unemployment and disability). Payroll tax deductions include the following:

• Social Security withholding (6.2% until the annual maximum is reached)

• 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 payroll tax is paid comes directly from the employer. Employers are required to pay a fixed or proportional amount 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 Federal Insurance Contributions Act (FICA) funds are paid. FICA is made up of Social Security and Medicare. The worker pays half and the employer pays half to arrive at 15.3% of the wage tax liability.

If you own a small business or work as an independent contractor, you may be required 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, prizes and allowances, you may be required to make estimated tax payments.If you are in business for yourself, you are generally required 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 taxes through withholding and estimated tax payments, you may be charged a penalty. You may also be charged a penalty if your estimated tax payments are late, even if a refund is due when you file your tax return” (irs.gov., pub. 505, withholding tax, and estimated tax).