Employers juggle many tasks, together with calculating and withholding payroll taxes and different deductions. However, what precisely does payroll taxes embody? And, how are you aware how a lot to withhold from staff’ wages? In case you’re questioning about understanding payroll taxes, by no means concern—your payroll taxes breakdown is right here.
What are payroll taxes?
How do payroll taxes work? Payroll taxes are a selected kind of employment tax. Not all employment taxes are payroll taxes. As an alternative, payroll taxes encompass the Federal Insurance coverage Contributions Act (FICA) tax. So, what’s FICA tax?
FICA tax is the mix of Social Safety and Medicare taxes. The federal government makes use of funds from the 2 taxes for various applications:
- Social Safety tax: Funds advantages for retirement, dependents of retired employees, and the disabled and their dependents.
- Medicare tax: Funds medical advantages for individuals age 65 and older, the disabled, and people with qualifying well being situations.
Social Safety and Medicare tax have totally different tax charges. And, there’s an further Medicare tax for qualifying staff (we’ll get to that later).
What are payroll taxes levied on? Employers should withhold these taxes from their staff’ wages. However, don’t withhold all the quantity of every tax from the worker. Employers share the accountability of paying FICA taxes with their staff. Present payroll tax on paystub to your staff.
Self-employed people aren’t exempt from paying federal payroll taxes. As an alternative of paying FICA tax, they have to pay self-employment tax. The Self Employed Contributions Act (SECA) tax requires self-employed people to pay Social Safety and Medicare taxes. SECA doesn’t cut up the tax between worker and employer. As an alternative, self-employed people should pay the whole thing of the tax themselves.
Different taxes in payroll
Once more, not all employment taxes are payroll taxes. Folks generally seek advice from all taxes deducted in payroll as payroll taxes. However, there are lots of varieties of employment taxes.
Employment taxes embody:
- Federal earnings tax
- State earnings tax
- Native earnings tax
- Federal unemployment (FUTA) tax
- State unemployment (SUTA) tax
Workers don’t pay all employment taxes. And likewise, employers don’t pay all employment taxes.
Earnings taxes solely come out of the workers’ wages. Federal unemployment taxes are employer-only taxes. State unemployment taxes are sometimes employer-only, however some states require each employers and staff to contribute to the tax (e.g., Pennsylvania).
Payroll tax charges
Workers pay the identical quantity of FICA payroll tax as employers as a result of the full quantity is cut up evenly. Self-employed people should pay all the quantity of each taxes. So, how a lot are payroll taxes for workers, employers, and self-employed employees?
Social Safety and Medicare tax charges
To know the way a lot FICA tax to pay or withhold, break it down into the 2 elements of the tax: Social Safety and Medicare.
Social Safety tax has the next tax price. It’s a flat 12.4% however solely applies as much as the Social Safety wage base, which generally adjustments annually. The 2024 Social Safety wage base is $168,600. Equally divide the full share between you and your staff. Withhold 6.2% out of your staff’ wages and contribute 6.2% because the employer (12.4% / 2).
Medicare tax has a flat tax price of two.9%. Like Social Safety tax, staff and employers equally share the full tax. So, employers and staff every pay 1.45% (2.9% / 2). Not like Social Safety, there isn’t any wage base or cap to the wages topic to the Medicare tax. As an alternative, there’s an extra Medicare tax of 0.9% as soon as staff earn above a certain quantity.
Extra Medicare taxes apply to staff based mostly on submitting standing:
- Married submitting collectively: $250,000
- Married submitting individually: $125,000
- Single: $200,000
Employers should withhold the extra Medicare tax after an worker earns above $200,000. Workers who earn above the edge should pay 2.35% for Medicare tax (1.45% + 0.9%). Employers proceed to pay 1.45% as a result of the extra Medicare tax price solely applies to staff.
Self-employment tax price
SECA tax is principally the identical as FICA tax, besides one individual pays the full quantity for every tax.
Social Safety tax is 12.4% and Medicare is 2.9% complete. So, the mixed price for SECA tax is 15.3%.
Self-employment Social Safety taxes solely apply as much as the Social Safety wage base.
A self-employed particular person should additionally pay the complete 2.9% of Medicare tax. Self-employment wages are additionally topic to further Medicare tax (0.9%). If the extra Medicare tax applies, the full tax price is 3.8% (2.9% + 0.9%). There is no such thing as a most quantity of Medicare tax a person will pay.
Payroll tax FAQs
Nonetheless have some questions on payroll taxes? Check out some often requested questions.
1. Is federal withholding tax a payroll tax?
Federal withholding is a tax calculated throughout payroll, nevertheless it’s not technically a payroll tax. As an alternative, federal withholding is an employment tax. One other identify for federal withholding is federal earnings tax.
2. Can employers make staff pay the full quantity of FICA tax?
No. Federal legislation requires employers to evenly cut up FICA tax with their staff. Solely self-employed people pay the whole thing of Social Safety and Medicare taxes.
3. What occurs if an worker meets the Social Safety wage base in the midst of a pay interval?
If an worker meets the Social Safety worker tax wage base in the midst of the pay interval, solely calculate the tax on wages as much as the quantity.
Say an worker receives biweekly paychecks and hits the wage base on the finish of the primary week of the pay interval. The worker’s complete paycheck is $6,000. Divide the gross pay by two and apply the Social Safety tax to the primary half of the gross wages ($6,000 / 2 = $3,000).
This text is up to date from its authentic publication date of October 20, 2015.
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