If you have ever checked your Payslip, you are sure to have seen payroll tax deductions from your salary or wage.
When employers pay their employees, they are bound to deduct a portion of the gross salary or wage and pay it to the government as payroll tax.
Federal, state, and local income tax collectors can levy the payroll tax. The purpose of collecting payroll taxes is to fund different public projects.
However, how does one pay payroll tax in the US? This article will help you learn everything you need to know about the tax system of the US.
What Is Payroll Tax?
Payroll tax is a tax contribution the federal, state, and local governments of the USA can levy upon the citizens. Employees withhold the payroll tax from the wages or the salary of the employees and pay it to the government. These taxes are used to fund different social security, Medicare, and different other public projects.
Both the employees and the employers have to contribute their equivalent share of payroll tax. This tax ensures Public social security and Medicare. That is why it is mandatory to pay the payroll tax. The different projects that the payroll tax helps fund are – Medicare, local infrastructure, Social Security, and more.
Some of the payroll tax examples are –
- Medicare: it provides healthcare coverage for older people aged above 65.
- Social security: offering income to people above the age of 62 and disabled individuals.
The government levies the payroll tax at the rate of 15.3%. This percentage of the FICA tax rate gets divided into two parts and is shared by both the employers and the employee. They have to pay 7.65% each in each of the payroll cycles.
Read More: What Is Excise Taxes? How To Pay It In USA?
Different Types Of Payroll Tax
As explained before, there are different types of payroll tax. The federal government, state government, and the local income tax department are all involved with the payroll tax. Here are the different types of payroll tax.
1. Federal Payroll Tax
Federal Insurance Contribution Act (FICA) is the payroll tax levied by the federal government. This type of payroll tax has two different parts, including social security and medicare tax.
2. Social Security Payroll Tax
Social security is paid for by both the employer and employees. As per the FICA percentage, both the employers and the employees take an equal share of the payable tax. However, they share the percentage only until the employees have a wage limit below $147,000.
3. Medicare Payroll Tax
Both the employers and the employees share the Medicare tax evenly as per the payroll tax rule. However, if the employees earn a salary/wage of more than $200,000 per year, they might be liable to pay extra Medicare tax.
4. Unemployment Taxes
Both the federal and the state governments levy unemployment tax. For the federal government, the employers are liable to pay the FUTA on the first $7000 an employee has earned. However, for the state, the wage base limit changes. Also, in some states, even the employees remain liable to pay unemployment tax.
5. State And Local Payroll Tax
Different states in the US and municipalities levy payroll taxes to pay for paid family medical leaves and other different programs.
Payroll Tax Rates
If you are an employee or an employer, it is crucial to know the payroll tax deduction rate. The employers don’t deduct more than the social security and Medicare tax. However, changes are visible in the state and local governments. Here is the payroll tax rates according to the US tax system –
|Unemployment||6% (0.6% with full reduction of the credit)|
Additional Medicare tax is applied based on the base of the wage. Also, the state unemployment tax rate varies according to the previous claim history of the employer.
How To Calculate Payroll Taxes?
The gross taxable wage of an employee gets multiplied by the payroll tax rate to determine the payroll tax they have to pay. The employer can calculate the total payroll tax in two steps. First, the Medicare deduction is made at the rate of 1.45%. Then the social security tax is deducted at a rate of 6.2%.
If the taxable wage is 1500 at a time, they have to pay $93 in Medicare taxes and $21.75 in social security tax.
How Do Employers Avoid Payroll Tax Penalties?
As an employer, you need to regularly manage your tax payments to avoid penalties. Here are different ways of avoiding penalties as an employer–
- Classify employees correctly.
- Withhold and pay payroll taxes on time.
- Use proper forms to file tax reports.
- Always remain updated with the recent changes in the tax law updates.
- Partner with reliable payroll service providers.
Frequently Asked Questions
Here are some popular questions people usually ask about payroll taxes–
Ans: Here are the different ways of paying payroll–
Pay through Online medium.
1. You can also pay by credit card
2. Pay by BPay.
3. Pay in person.
4. Pay by post.
Ans: In Canada, the payroll tax is more complex compared to the USA. This is because it simultaneously includes federal, territorial, CPP, and EI tax. However, employees and employers share the CPP and EI tax.
Ans: Both employers and employees are liable to pay payroll tax. In addition, they are liable to pay social security and medicare tax according to federal tax laws and percentages. The tax is calculated upon the taxable wage of the employees. However, state and local taxes might differ due to the difference in the minimum level of taxable wage.
If you are an employee, you can check your Payslip to see that your employer deducts your share of payroll according to the federal and state tax rates. You usually pay 7.65% of your taxable wage during each payroll cycle. The employer remains liable to pay the equivalent amount during the tax payment.
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