What is Payroll Tax? - Definition & Example

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  • 0:00 Payroll Tax Defined
  • 0:55 Types Of Payroll Taxes
  • 3:00 Example
  • 3:30 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will define the payroll tax and explore the various types of payroll taxes. Also, an example that looks at payroll taxes from the viewpoint of the employee will be provided.

Payroll Tax Defined

If you have ever received a paycheck, then you have probably noticed that a portion of your pay is taken out for various taxes. What you might not know is that your employer pays taxes on your wages as well - out of their own pocket. These taxes are called payroll taxes.

The payroll tax is a multitude of taxes that are paid by the employer, and in some cases, withheld from an employee's paycheck. The employer then remits these taxes to the appropriate tax authority.

There are numerous types of payroll taxes, including:

1. Federal income tax withholding

2. Social Security tax withholding

3. Medicare tax withholding

4. Additional Medicare tax withholding

5. State income tax withholding

6. Various local tax withholdings (city, county, school district)

Types of Payroll Taxes

The appropriate amount to be withheld from an individual's paycheck depends on their gross wages, where they reside, and where they work. Let's briefly explore each of the payroll taxes.

Federal Income Tax

Federal income tax withholding is withheld per IRS tables in publication 15. When you are hired, you fill out a form called a W-4. This indicates to your employer how many allowances you wish to claim. The employer takes this information, along with your wages, and looks up in IRS publication 15 how much in federal income taxes to withhold from your paycheck.

Social Security and Medicare Tax

Combined, the Social Security tax withholding and Medicare tax withholding are known as FICA (Federal Contributions Insurance Act). In 2014, the tax responsibility for individuals was 7.65%; 6.20% was Social Security tax, the remaining 1.45% was Medicare tax. The employer responsibility was also 7.65%. However, the Social Security tax has a wage base limit, and in 2014, that limit was $117,000. So wages over $117,000 were not taxed with the Social Security tax that year.

Additional Medicare Tax

The additional Medicare tax withholding is levied only on employees earning more than $200,000. This tax began in 2013, and is 0.9%, paid by the employee.

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