If you have employees, you must pay the employer share of their Social Security and Medicare taxes, and withhold their share of those taxes from their wages. For 2014, you must pay 7.65% and your employee must pay 7.65% on the first $117,000 of the worker's wages.
For income above that level, you and your employee must keep paying only the Medicare portion of the tax, which is 1.45% for each of you. The taxes must be deposited with the IRS periodically; how often you send in these funds depends on how large the deposits are. You can deduct the employer share of these employment taxes as a business expense on Schedule C.
What about your own employment tax liability?
If you're a sole proprietor, partner, independent contractor or are otherwise self-employed, you must pay the full freight—15.3% in 2014 on the first $117,000 of your net earnings from self-employment, which you calculate on Schedule C. For net earnings above that amount, you'll still owe Medicare taxes of 2.9%. You can deduct half of your self-employment tax when figuring Adjusted Gross Income on your 1040. That's not as good as paying half the liability—as employees do—but it's better than nothing.
Employee or Independent Contractor?
It's important to distinguish between workers you hire as employees and contract labor, because your tax liability and reporting are different depending on which type of worker you use. You don't pay or withhold employment tax for independent contractors as you would your employees. At year-end, you'll report payroll information for employees using Forms W-2 and W-3, while you'll use Form 1099-MISC for anyone who is a contractor.
The IRS monitors employers to make sure they aren't avoiding employment tax liability by classifying workers as contractors when they really are employees. The IRS looks to see how much control the employer has over the details of a worker's performance and whether the employer also exerts financial control. If, for example, you pay your workers an hourly wage, reimburse all their work-related expenses, dictate where they do their work, train them and provide them with equipment, you'll have a hard time making a case for classifying them as contractors.
For more information, review IRS Publication 15-A: Employer's Supplemental Tax Guide.