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What Are Payroll Taxes (All You Need To Know)

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What Are Payroll Taxes

Payroll taxes represent an amount of money that employers withhold from employees’ salaries in taxes and that they will then send to the government on behalf of the employee.

Depending on the employee’s salary, the amount of taxes that the employer withholds may be different.

Typically, individuals earning salaries, wages, tips, or other types of earnings will have to pay the payroll tax through their employer.

According to Investopedia, the payroll tax is defined as follows:

A payroll tax is a percentage withheld from an employee’s pay by an employer who pays it to the government on the employee’s behalf.
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An employee will need to pay federal payroll tax and possibly state, city and county payroll taxes.

The government receiving the payroll taxes will then use those funds to pay for various programs like Medicare and Social Security. 

Local governments that collect payroll tax will use the funds to finance various services like first responders or maintain their local infrastructure.

Payroll Tax History

The Social Security tax started in the 1930s following the adoption of the Social Security Act in 1935.

The objective of the SSA was to provide financial safety to returned individuals and those who where disabled.

Medicare payroll tax started in the 1960s to helf finance the healthcare system, hospital, and related services.

What Is Federal Payroll Tax

A federal payroll tax is an amount of money that is withheld by an employer on an employee’s salary in taxes to be remitted to the Internal Revenue Service or IRS.

The reason why it’s called a federal payroll tax is that the taxes are paid to the federal government.

The federal payroll taxes employees pay help fund programs such as Medicare, Social Security programs, healthcare, and workers’ compensation programs.

When a deduction is made to fund Medicare, you’ll generally see MedFICA and FICA on your pay stub.

What Is State Payroll Tax

State payroll taxes are taxes withheld on employee salaries and remitted to the state government.

The reason why a state government may collect a small state payroll tax is to allow them to maintain their local infrastructures and services.

Typically, the state payroll tax will be used to fund things like road maintenance, parks, and first responders.

What Are Payroll Tax Rates

Let’s look at the payroll tax rates to give you an better understanding of how much taxes employees need to pay.

In 2021, the Social Security payroll tax rate was of 6.2% for employees and 6.2% for employers giving a total of 12.4%, and the Medicare payroll tax rate was of 1.45% for employers and 1.45% for employees giving a total of 2.9% for Medicare.

As a result, employers have FICA taxes to pay at a rate of 7.65% and the same for employees giving a total payroll tax collected by the government of 15.3%.

Medicare Payroll Tax

When employers withhold payroll taxes for the federal government, the funds will be used to program specific programs such as Medicare.

The funds paid for Medicare go into two different trust funds:

  • Hospital Insurance Trust Fund
  • Supplementary Medical Insurance Fund

The funds that go to the Hospital Insurance Trust Fund helps pay for Medicare Part A whereas the Supplementary Medical Insurance Fund pays for Medicare Part B and D.

Medicare Part A covers things like hospital care and nursing.

Medicare Part B covers things like laboratory tests and screenings and ambulance services.

Medicare Part D covers prescription drugs.

Social Security Payroll Tax

When companies deduct payroll taxes, some of that money will be used by the government to finance Social Security.

The funds will be eventually paid into two trust funds:

  • Old-Age and Survivors Insurance Trust Fund (OASI)
  • Disability Insurance Trust Fund 

The OASI pays retirement and survivor benefits whereas the Disability Insurance Trust Fund pays disability benefits.

What Is Payroll Tax vs Income Tax

What are the differences between payroll taxes and income taxes?

Although both payroll tax and income tax are withheld from your paycheck, they are different.

The payroll tax is a type of tax that is deducted from your pay by your employer and remitted to the government to fund very specific programs like Social Security and Medicare.

On the other hand, income tax is a type of tax that is deducted from your pay by your employer and remitted to the government in anticipation of the income tax that you need to pay.

Typically, everyone pays the same payroll tax up to a certain limit in the year (it’s a regressive tax that is capped).

On the other hand, income taxes can vary from one person to the next as everyone’s income tax will depend on their total earnings for the year.

Finally, payroll taxes are paid into specific trust funds such as:

  • Hospital Insurance Trust Fund
  • Supplementary Medical Insurance Fund
  • Old-Age and Survivors Insurance Trust Fund (OASI)
  • Disability Insurance Trust Fund 

However, income taxes are paid to the US treasury.

What Is Payroll Tax Frequently Asked Questions

Let’s look at a few common questions related to what are payroll taxes.

What is included in payroll taxes

If you look at your latest pay stub, you’ll probably notice two types of taxes withhold from your pay, namely FICA and MEDFICA.

FICA is a payroll tax deducted further to the Federal Insurance Contribution Act while MEDFICA is further to the Medicare Federal Insurance Contribution Act.

What payroll taxes do employers pay

Employers are required to withhold a certain amount of money from their employees’ salaries and wages as payroll tax and remit that to the government.

The term “payroll taxes” that employers are required to pay are FICA taxes, which includes Medicare and Social Security payroll taxes, along with other taxes such as state-imposed taxes.

What is payroll withholding

Payroll withholding is a phrase used to refer to the amount of money that is withheld from an employee’s paycheck.

One main type of payroll withholding is the amount of money employers deduct to pay for payroll taxes.

There may be several different types of taxes that can be withheld from a person’s salary such as payroll taxes and income taxes.

On the other hand, payroll withholding can also be done for other reasons such as a salary garnishment, voluntary payroll deductions, alimony and support payments, or further to an agreement to pay the employer.

Who pays payroll taxes

Employers and employees pay a share of some of the payroll taxes.

As an employee, a specific payroll tax rate will apply to you.

However, if you are self-employed, your overall payroll tax liability goes up.

In fact, self-employed individuals must remit their own payroll taxes (also called self-employment taxes).

Since self-employed workers do not have an employer to handle their payroll deduction, they are in charge of handling their own payroll tax deductions.

What is the difference between payroll tax and income tax 

The payroll tax is tax that is withhold from an employee’s paycheck to fund specific programs such as Medicare, Social Security, healthcare programs, and workers’ compensation.

On the other hand, income taxes are taxes that are withheld are paid to the IRS and go to the general fund of the U.S. Treasury and from there the federal government uses the funds to advance its mission and program.

Also, income taxes are progressive taxes whereby the more you earn, the more taxes you will pay in dollar terms.

Payroll tax can be a regressive tax.

For instance, you pay Social Security tax up to a certain income limit over which your income is no longer subject to any payroll tax.

What are statutory payroll deductions

Statutory payroll deductions are sums of money that employers are legally required to withhold and deduct form a person’s salary or pay.

The following payroll deductions are considered statutory payroll deductions as they are mandated by law:

  • Federal income tax withholding 
  • Social Security tax withholding 
  • Medicare tax withholding 
  • Additional Medicare tax withholding 
  • State income tax withholding
  • Other local tax withholding 

What are voluntary payroll deductions

Voluntary payroll deductions are sums of money deducted from a person’s salary based at the request of the employee.

There are different types of payroll deductions that can be made voluntarily, such as:

  • To pay for health insurance premiums
  • To pay for life insurance premiums
  • To contribute to a retirement plan 
  • To purchase company stocks 

What are unemployment taxes

In the United States, employers are required to report a state and federal unemployment tax.

For example, the IRS, in its Publication 15, Employer’s Tax Guide, makes it clear that employees do not pay unemployment tax and it should not be withheld from their pay.

The reason why this tax is paid by employers is to allow employees in the United States have a safety net in case their are laid off or lose their jobs.

Depending on the industry or whether you are paying Federal Unemployment Tax or State Unemployment Tax, the tax rates can vary.

What Is Payroll Tax Takeaways 

So, what is payroll taxes in simple terms?

What is included in payroll taxes?

What is tax on paychecks?

In a nutshell, payroll taxes are taxes that you pay on your wages or salary.

The reason why it’s called payroll taxes is that your employer will deduct them directly from your pay (you are paying them through your payroll).

In most cases, payroll taxes are calculated as a percentage of the employee’s salary.

In the United States, according to the US Department of the Treasury, in 2021, payroll taxes made up 31% of the federal tax revenue amounting to $1.25 trillion.

I hope I was able to answer your questions related to payroll taxes such as what are employment taxes, what taxes are deducted from paycheck, what do payroll taxes fund, what is payroll tax rate, and how it works.

Good luck!

Let’s look at a summary of our findings.

Understanding What Are Payroll Taxes

  • Employers withhold taxes on the salaries and wages they pay to their employees (called payroll taxes) and remit them to the government 
  • You will see two key deductions on your paycheck labelled as FICA and MEDFICA
  • Your payroll taxes are used to finance specific programs like Medicare and Social Security 
  • A large portion of why your net salary is below your gross salary is due to the payroll taxes that are withheld for you and paid to the government on your behalf 
1099-NEC Form
Employer wage garnishment 
Form 940
Form 941
Form 945
W2 Form
W4 Form 
What are Medicare Wages
What is a trust fund
What is DITF
What is FICA
What is HITF
What is Medicare
What is OASI
What is progressive tax
What is regressive tax 
What is Social Insurance
What is Social Security
Author
Best states for taxes
How to avoid taxes
Income after taxes 
Payroll taxes
Recapture taxes 
Tax assessor
Tax attorney 
Tax deductible expenses
Tax free wealth 
Tax fugitive
Tax relief 
Taxes on death
Taxes on selling a house
Taxes on stock gains
Tax-exempt corporation 
What are sales taxes
What is a capital gain 
What is a write off on taxes
What is an allowance on taxes
Author

Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!

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