What Are Payroll Taxes And Who Pays Them?
The taxes that both employees and employers pay on salaries, wages, and tips are referred to as payroll taxes. Employers deduct taxes from employee paychecks and send the money to the government. Along with the employee’s part of Social Security and Medicare taxes, these levies include federal, state, and local income taxes (FICA). Employers are responsible for paying federal and state unemployment taxes and their portion of FICA.
Understanding Payroll Taxes
Social Security and Medicare contributions are covered by federal payroll taxes, which comprise the Federal Insurance Contributions Act (FICA) levy in the United States. On pay stubs, these are identified as MedFICA and FICA. Additionally, deducted from employee paychecks, federal income tax goes into the U.S. Treasury’s general fund.
Income taxes are levied by most states, certain cities, and counties, and the money collected goes straight into their coffers. Additionally, companies pay federal unemployment taxes for each of their employees but not employees themselves.
Federal authorities and some state governments collect Medicare payroll taxes in numerous nations, including the United States. On a worker’s pay stub, these payroll tax deductions are itemized. The itemized list includes the amounts deducted for Medicare and Social Security payments and the sums collected for federal, state, and local income taxes.
Governments use payroll taxes to pay for various programs, such as Social Security, healthcare, and workers’ compensation. Local governments may levy a tiny payroll tax to maintain and enhance local infrastructure and services, such as first responders, road upkeep, and parks.
How Employer Payroll Taxes Work
Employers must calculate their share of taxes, withhold the appropriate amount from employees’ paychecks, deposit the funds, and file returns with the appropriate authorities on time. The taxes that typically need to be paid each pay period are as follows:
Social Security and Medicare taxes
The federal Social Security and Medicare programs are funded by Federal Insurance Contribution Act (FICA) levies. 15.3% of a person’s wages are owed each pay period; half of that amount is paid by the employee and the other half by the employer. This entails that each party contributes 1.45% for Medicare with no cap and 6.2% for Social Security up to a wage base maximum of $160,200. However, companies are not required to match the additional 0.9% Medicare premium that employees earning above $200,000 may be charged.
Federal income tax
Federal income tax is determined based on the wages earned during the pay period and the information on Form W-4 and is only paid for by the employee.
State and local income tax
These taxes vary by location and are paid solely by the employee.
Federal and state unemployment
Unemployment taxes are typically only paid by employers, although in a few places, employees also contribute. Depending on the amount of state unemployment tax paid by the employer, the federal rate might range from 0.6 to 6%.
How To Calculate Federal Payroll Tax Withholdings
The calculation of federal income taxes is trickier than the flat rate FICA taxes. Employers may utilize the IRS wage bracket technique as follows to determine what to withhold for an employee who earns up to $100,000 annually and has submitted the updated 2020 Form W-4:
Adjust the employee’s wage amount.
Completing Step 4 on the Form W-4 by employees may necessitate a wage adjustment. To do this, add any additional revenue that isn’t from a second job to the total salary after dividing it by the number of pay periods. Next, remove this amount from total wages if the employee deducts anything in addition to the standard deduction. To do this, divide the amount by the number of pay periods.
Determine the tentative withholding amount.
Use the wage bracket tables from Publication 15-T to calculate the employees’ prospective withholding amounts after adjusting their pay. Cross-reference the adjusted wage ranges in the two columns on the left with the various filing statuses in the six columns on the right. Therefore, the estimated withholding amount is $60 for an employee who earns an adjusted weekly income of $900 and files as the head of household with standard withholding.
Account for tax credits
The IRS made it simpler in 2020 for employees to claim allowances for children and other dependents on their Form W4. Employees can now claim a total credit amount for claimed dependents on Step 3 of Form W4. Subtract the result from the estimated withholding amount by multiplying this amount by the total number of pay periods.
Tally the final withholding amount
Employees can withhold additional taxes each paid month by entering the desired amount in Step 4(c) of Form W-4. This sum should be added to the estimated withholding amount.
Payroll Tax Transparency
In addition to being misleading, the federal government’s imposition of “employer-side” payroll taxes also raises the possibility of another issue: it hides the expenses of the services that payroll taxes support. In other words, half of the taxes that pay for Social Security and Medicare are hidden from workers in the form of lower earnings rather than showing how much the average taxpayer contributes to each program directly.
This is problematic since it goes against the notion of tax transparency, which argues that tax obligations should be kept from taxpayers through intricate systems. Voters may misunderstand the true financial impact of these social programs since about half of the payroll taxes that support Social Security and Medicare are concealed in reduced earnings rather than explicitly stated on our pay stubs.
1. What Makes Up Payroll Taxes?
Medicare and Social Security taxes. 15.3% of a person’s wages are owed each pay period; half of that amount is paid by the employee and the other half by the employer. This implies that each party contributes 1.45% for Medicare with no cap and 6.2% for Social Security up to a wage base limit of $160,200.
2. What Is the FICA Tax
The federal government levies the FICA payroll tax to pay for Social Security and Medicare.
3. Does Everyone Pay a Payroll Tax
Yes, most people pay payroll taxes, which are automatically taken out of their paychecks. Everyone pays the same amount for Social Security and Medicare taxes, whereas income tax is progressive (those that make more are taxed at a higher rate).