Definition of Payroll Taxes
Payroll taxes are taxes paid by the employee and employer before the employee gets his paycheck. As opposed to income tax, there is no choice as to whether they are paid with each check or at the end of the tax year, and there are no deductions as there are with income taes. Payroll taxes are purely income-based, and they go to very specific services.
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Definition
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Payroll tax must be paid by all employees and employers. It is paid by employees when their employer withholds it from their paycheck; the same amount is then matched by the employer, creating a tax that is paid half by the employee and half by the employer who hired him.
Where Does It Go?
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Payroll taxes, originally set by the Federal Insurance Contribution Act (FICA), go toward Medicare and Social Security. Since these are government services that almost everyone will draw out of at some stage, they are paid for out of payroll taxes rather than income taxes, as this allows the net amount received by the government for these services to be kept stable. It also pays for state and federal unemployment taxes.
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How Do I Pay?
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If you are an employee, fill out IRS form W-4. This will make sure FICA taxes come out of your payroll. Your employer will make sure you do this. If you are an employer, you need to make sure your employees fill out this form, then make sure you match their contributions.
How Much--Social Security
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As of June 2010, the Social Security tax rate is 12.4 percent, paid by the employee and the employer. This means that both the employee and employer pay 6.2 percent. When the employer reaches the wage base, neither party has to pay any more.
As of June 2010, the wage base is $106,800 per year--this means that if someone earns $106,800 per year their contribution will be $6,621.60, which will be matched by their employer, making a total of $13,243.20. If someone makes $500,000 per year, they will pay the same amount, as only their first $106,800 will be taxed.
How Much--Medicare
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As of June 2010, the Medicare rate was 2.9 percent, with 1.45 percent paid by the employee and 1.45 percent paid by the employer. There is no wage cap.
This means that the employee above, who earns $106,800 per year, will pay $1,548.60 per year, with his employee matching the same amount, making a total of $3,097.20. The employee who makes $500,000 per year, however, will pay $7,250, an amount that will be matched by his employer to make $14,500 total. This is an effect of the lack of a wage cap.
How Much--Unemployment
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The federal unemployment tax rate is 6.2 percent. Each state, however, has a different unemployment tax rate. It is possible to credit up to 5.4 percent of state taxes against your federal unemployment tax. This means that if your state unemployment tax is 5 percent, you only owe the federal government 1.2 percent. However, if a state's unemployment tax is 10 percent, you still owe the federal government 0.8 percent.
The wage cap for unemployment is $7,000.
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References
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