What Are Payroll Taxes? | Sorts, Employer Obligations, & Extra

Employers juggle many duties, together with calculating and withholding payroll taxes and different deductions. However, what precisely does payroll taxes embrace? And, how are you aware how a lot to withhold from workers’ wages? In the event 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 particular sort 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 folks age 65 and older, the disabled, and people with qualifying well being circumstances. 

Social Safety and Medicare tax have totally different tax charges. And, there may be an extra Medicare tax for qualifying workers (we’ll get to that later). 

What are payroll taxes levied on? Employers should withhold these taxes from their workers’ wages. However, don’t withhold your entire quantity of every tax from the worker. Employers share the accountability of paying FICA taxes with their workers. Present payroll tax on paystub on your workers. 

Self-employed people will not be exempt from paying federal payroll taxes. As an alternative of paying FICA tax, they need 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 break 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 discuss with all taxes deducted in payroll as payroll taxes. However, there are lots of kinds of employment taxes. 

Employment taxes embrace:

  • 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 staff’ wages. Federal unemployment taxes are employer-only taxes. State unemployment taxes are usually employer-only, however some states require each employers and workers to contribute to the tax (e.g., Pennsylvania). 

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Payroll tax charges

Workers pay the identical quantity of FICA payroll tax as employers as a result of the overall quantity is break up evenly. Self-employed people should pay your entire 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 understand how a lot FICA tax to pay or withhold, break it down into the 2 components of the tax: Social Safety and Medicare. 

Social Safety tax has a better tax price. It’s a flat 12.4% however solely applies as much as the Social Safety wage base, which generally modifications annually. The 2024 Social Safety wage base is $168,600. Equally divide the overall share between you and your workers. Withhold 6.2% out of your workers’ 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, workers and employers equally share the overall tax. So, employers and workers every pay 1.45% (2.9% / 2). In contrast to Social Safety, there isn’t a wage base or cap to the wages topic to the Medicare tax. As an alternative, there may be an extra Medicare tax of 0.9% as soon as workers earn above a certain quantity. 

Further Medicare taxes apply to workers primarily based 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 workers. 

Who pays fica taxes? Fica tax is made up of Social Security and Medicare taxes. The different taxes are paid equally by employers and employees. For social security taxes, employers pay 6.2% and withhold 6.2% from employee wages. For Medicare tax employers pay 1.45% and withhold 1.45% from employee wages.

Self-employment tax price

SECA tax is principally the identical as FICA tax, besides one individual pays the overall 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 extra Medicare tax (0.9%). If the extra Medicare tax applies, the overall tax price is 3.8% (2.9% + 0.9%). There isn’t a most quantity of Medicare tax a person pays. 

Payroll tax FAQs

Nonetheless have some questions on payroll taxes? Check out some ceaselessly requested questions.

1. Is federal withholding tax a payroll tax?

Federal withholding is a tax calculated throughout payroll, however it’s not technically a payroll tax. As an alternative, federal withholding is an employment tax. One other title for federal withholding is federal earnings tax. 

2. Can employers make workers pay the overall quantity of FICA tax?

No. Federal regulation requires employers to evenly break up FICA tax with their workers. 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.

This isn’t meant as authorized recommendation; for extra data, please click on right here.


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