Michael is a financial planner and has a master's degree in financial services.
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)
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 withholding is withheld per IRS tables in publication 15T. When you are hired, you fill out a form called a W-4. This indicates to your employer how many dependents you wish to claim. The employer takes this information, along with your wages, and looks up in IRS publication 15T for how much in federal income taxes to withhold from your paycheck.
Combined, the Social Security tax withholding and Medicare tax withholding are known as FICA (Federal Insurance Contributions Act). In 2020, 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 2020, that limit was $137,700. So wages over $137,700 were not taxed with the Social Security tax that year.
The additional Medicare tax withholding is levied only on employees earning more than $200,000 for a single or head of household filer, and $250,000 for married filing jointly.This tax began in 2013, and is 0.9%, paid by the employee.
State income tax withholding, if applicable (some states do not have a state income tax), is withheld in a similar manner as federal income tax withholding.
Various local tax withholdings, if applicable, are withheld if required by the local tax authorities. Examples of various local tax withholdings include city income taxes and school district income taxes.
Let's look at an example of payroll tax withholding from the viewpoint of the employee. Our fictitious employee, Rex files as a single taxpayer and works at DEF Companies as an administrative assistant. Rex is paid every two weeks and is salaried at $26,000 per year.
As can be seen in the graphic below, each time Rex is paid, $361.36 is withheld from his paycheck towards payroll taxes and other items. His employer withholds these and remits them to the appropriate authorities.
| Sample Net Pay | ||
|---|---|---|
| Gross Pay | $1,000 | |
| Payroll Taxes | ||
| Federal Tax Withholding | Pub15T | $94.86 |
| Social Security Withholding | 6.2% | $62.00 |
| Medicare Withholding | 1.45% | $14.50 |
| State Income Tax Withholding | 4.5% | $45.00 |
| City Income Tax | 1.5% | $15.00 |
| Deductions | ||
| Retirement | 3% | $30.00 |
| Health Insurance | $100.00 | |
| Net Take Home Pay | $638.64 |
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 authorities.
Examples of payroll taxes include:
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)
Not all of these payroll taxes are applicable to employees. For example, some states do not levy an income tax; therefore, state income tax withholding does not apply there.
To unlock this lesson you must be a Study.com Member.
Create your account
Already a member? Log In
Back