Every time you get paid, the final amount you receive is less than your stated pay rate. For this, you can thank payroll taxes, which employers have been responsible for deducting from paychecks for more than eight decades.
Employer payroll taxes are a feature of the Federal Insurance Contributions Act, also known as FICA, which Congress adopted in 1935. FICA began as a way to pay for the then new Social Security program, created in response to the Great Depression. Since then, employers have deducted Social Security and other taxes to fund social programs that benefit people in the US.
What are employer payroll taxes?
Employer payroll taxes are when an employer deducts money from a worker’s income. Federal and state governments use employer payroll taxes to help pay for social programs and support retirement benefits, among other uses. Although the employer collects the money, this is paid solely by the employee, not the employer.
How do payroll taxes work?
Each pay period, the employer is responsible for withholding payroll taxes, which represent a percentage share of the employee’s pay. The employer then remits the taxes to the IRS monthly or semi-weekly, depending on the amount. An employer must also file a quarterly return, known as IRS Form 941, to report the taxes.
An employer pays 7.65% for the Social Security and Medicare portions of payroll taxes. In addition, the employer pays the Federal Unemployment Tax Act rate of 6% on the first $7,000 of the employee’s pay. But employers can receive a credit of up to 5.4% if they pay state unemployment taxes, meaning they pay only 0.6% in federal unemployment insurance tax. Income taxes also are deducted from an employee’s paycheck, although the employer doesn’t pay these taxes. These taxes are paid only by the employee.
Types of employer payroll taxes
There are a variety of employer payroll taxes that an employer deducts from a worker’s pay. Some payroll taxes are solely the employer’s responsibility, while others are paid by the employee even though the employer deducts them from a worker’s paycheck.
- Social Security tax
- Medicare tax
- Federal income tax
- State and local income tax
- State unemployment tax
Social Security tax
The Social Security tax is deducted from an employee’s taxable income, including regular wages, bonuses, and commissions. An employer is also responsible for a portion of the taxes. The rate is 6.2% of the employee’s income, and the employer pays the same amount, for a total of 12.4%. There is a limit to the Social Security tax. As of 2022 this tax only applied to the first $147,000 of salary, and any wages over that amount were exempt. The money collected for Social Security funds disability payments, survivorship payments, and retirement benefits to eligible Americans.
The Medicare tax also has an employer-matching portion and an employee portion. The Medicare tax funds health insurance for people receiving disability payments and people over age 65. The employer pays the equivalent of 1.45% of a worker’s wages in Medicare tax, and the employee pays the same amount, for a total of 2.9%. There is an additional Medicare tax of 0.9% on employee income of more than $200,000 a year. The employer is only responsible for collecting this tax, not paying it.
Federal income tax
Federal income tax is not one of the payroll taxes that an employer has to pay. Still, the employer is required to collect the tax and remit payment to the IRS. The tax rate ranges from 10% to 37%, based on the employee’s income and tax filing status. The employer deducts this percentage from the employee’s income each pay period. Federal income taxes pay for such things as national defense, law enforcement, and general government operations.
State and local income tax
As with federal income taxes, employers do not pay a portion of state and local income taxes, but they are responsible for deducting them from the employee’s wages. Most states and some local municipalities collect income tax. Eight states do not have personal income taxes: they are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not collect state income taxes from wages but does assess the tax on dividends and interest income. State income tax rates range from 1% to 12.3%. State and local income taxes help pay for local schools, state Medicaid programs, and children’s state health insurance.
State unemployment tax
The state unemployment tax helps pay unemployment insurance benefits to employees after off. Only the employer is responsible for this payroll tax in most states, although Alaska, Pennsylvania, and New Jersey require that employees pay a portion of it as well. If the employer pays state unemployment tax, they can receive a credit on the federal unemployment tax. The state unemployment tax rates vary based on state, type of business, and whether the employer is new or experienced. Rates range from 0.04% to 20.93% for state unemployment taxes. A wage base limit exists in all states, so only a portion of an employee’s income is subject to the state unemployment tax.
How to calculate employer payroll taxes
To calculate the employer’s share of Social Security tax, multiply 6.2% by the employee’s gross taxable wages. If the employee earns more than $147,000, only calculate the tax on the income below that level. The result is the amount the employer should deduct and pay from the employee’s wages. The employer is responsible for paying a matching 6.2%.
To calculate the Medicare tax, multiply 1.45% by the employee’s gross taxable wages. This calculation gives the amount the employer withholds from the employee’s pay and the amount the employer is responsible for remitting for Medicare taxes. Employees earning more than $200,000 must pay an additional 0.9% in tax on income above this level. The employer must deduct this amount from the employee’s pay, but the employer does not match this amount.
For income taxes, the rates vary based on the state and the employee’s income. Multiply the percentage rate by the employee’s gross taxable wages for the amount of tax to withhold. The employer must calculate, collect, and remit the funds, but does not pay.
To calculate the state unemployment tax rate, use the tax rate provided by the state and multiply it by the employee’s income, taking into account the wage base limit of the state. This amount is not deducted from the employee’s pay and is paid only by the employer.
The employer must calculate separate taxes for each employee of the business.
Other tax considerations for employers
As a business owner, to properly collect and pay taxes, you must have an employee fill out a W-4 IRS Form; this is the Employee’s Withholding Certificate. It provides the information needed to calculate income taxes.
To pay your state unemployment tax, you need an employer identification number from the IRS and to register as an employer with your state. Once registered with your state, you will receive your state unemployment tax rate, which tells you how to calculate and how much to pay.
Employer payroll taxes FAQ
What payroll taxes do only employers pay?
Only employers are responsible for paying the federal unemployment tax. The state unemployment tax is also mainly the employer’s responsibility, except in Alaska, New Jersey, and Pennsylvania. Those states require payment from the employee as well as the employer.
What payroll taxes do both the employee and employer pay?
The employee and employer are responsible for paying Social Security and Medicare taxes, which are known as FICA taxes.
What is the difference between income taxes and payroll taxes?
The main difference is who pays the taxes. Income taxes are only the responsibility of the employee. Payroll taxes, such as Social Security and Medicare, require employers and employees to pay them.