Payroll Tax & Employer Contribution
The federal and state governments regulate payroll taxes. Federal payroll taxes are Social Security, Medicare, unemployment and income withholding. State payroll taxes include unemployment, disability or workers' compensation and income withholding. Employers are responsible for collecting and depositing all taxes to the appropriate agencies. Some taxes, such as unemployment, are only employer taxes. Federal and state income withholding taxes are only employee taxes. Both employees and employers pay a share of Social Security and Medicare taxes.
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Social Security & Medicare
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Social Security tax is collected toward the employee's retirement and disability benefit. Social Security deductions stop when an employee reaches the annual wage base limit. The limit may change every year. Social Security is 6.2% of an employee's gross income. Medicare is collected toward medical care. There is no annual wage base limit for Medicare. Medicare is 1.45% of the employee's income. Social Security and Medicare are deducted from the employee's paycheck, and the employer matches the deductions. The taxes are sent to the Internal Revenue Service (IRS).
Federal Unemployment
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The Federal Unemployment Tax Act (FUTA) provides unemployment compensation for individuals who have lost their jobs. FUTA is typically 6.2% of the first $7,000 of wages. The majority of businesses receive a credit of 5.4% for contributing to state unemployment funds, thereby dropping the rate to 0.8%. Some businesses, such as schools, are exempt from FUTA. Pre-tax health insurance and retirement plans lower the taxable income. FUTA is deposited with the IRS.
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State Unemployment
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State unemployment, like federal unemployment, provides compensation for lost income. The wage base limit and tax rate vary by state. A business is liable for state unemployment in the state that the employee works. If an employee resides in another state, the business is not liable for unemployment in that state. State unemployment is deposited with each applicable state.
Disability and Workers' Compensation Taxes
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Some states also have disability or workers' compensation taxes, the name of which may vary. For example, California has State Disability Insurance (SDI) Tax, whereas Washington has Labor and Industry (L&I) Tax. The wage base limit and tax rate differ by state. Some states require the employer and employee contribute a portion, such as Washington. Other states only require the employees to contribute a portion, as in California. The funds are to aid workers who are out due to a condition that inhibits them from working. The tax is deposited with each applicable state.
Federal and State Income Withholding Taxes
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Federal and state income withholding taxes are deducted from an employee's paycheck. These taxes are calculated based on income, pre-tax deductions and allowances. Pre-tax deductions such as health insurance and retirement contributions lower taxable income. Allowances also decrease the amount of taxable income. The IRS Form W4 and the applicable state form, for example Maryland's Form MW507, determine the employee's allowances. Federal withholding tax is sent to the IRS along with both portions of Social Security and Medicare. State withholding taxes are sent to the applicable state.
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References
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