In the United States, "gross salary" represents the amount of wages paid to an employee prior to reductions for prepaid income taxes, Federal Insurance Contributions Act (FICA) taxes, Medicare taxes and a variety of state and local taxes. Salary after those tax payments is known as an employee's "net salary."
Federal Income Tax
The U.S. Internal Revenue Service (IRS) requires U.S. employers to withhold prepaid income taxes from an employee's salary. The amount of withholding is based on personal information provided by the employee, the amount of the employee's gross salary or wage payment and rate tables produced by the U.S. Department of the Treasury. Employers that fail to withhold proper amounts from an employee's salary may be subject to fines and penalties. In addition, employees who fail to prepay sufficient income tax are subject to penalties and interest charges.
State Income Tax
Each of the 50 U.S. states has differing income tax rules and regulations. In general, however, the requirements for state income tax withholding follow the same guidelines as federal income tax withholding, with the significant exception that state tax rates are generally greatly below federal levels. Income tax is withheld by employers on behalf of employees at rates provided by each state's department of revenue or taxation. A few states have no state income tax and, thus, no state income tax withholding requirement.
FICA is an income-based payroll tax used to fund the Social Security system. Because the amount of a taxpayer's future Social Security benefits are directly tied to that taxpayer's FICA contributions, many people consider FICA to be a mandatory retirement savings plan. FICA taxes are required by law to be funded 50 percent by employers and 50 percent by employees. Only the employee portion is deducted from gross salary or gross wages. For 2009 and 2010, FICA is set at 12.4 percent of gross salary up to $106,800. After $106,800, no FICA tax is due.
Employee payments to Medicare's Hospital Insurance program are also deducted from an employee's gross wages. Medicare taxes, like FICA, are paid 1/2 by employers and 1/2 by employees. Medicare tax rates for 2009 and 2010 are set at 2.9 percent and, unlike FICA, have no upper income wage limitation. Also unlike FICA, Medicare taxes paid are not linked to the amount of future Medicare benefits afforded a taxpayer.
State and Local Taxes
Gross salary is typically further reduced by a wide variety of state and local taxes, fees and surcharges. These taxes vary greatly from jurisdiction to jurisdiction. Often these deductions include local income tax withholding, local occupation tax, employee-funded state unemployment insurance or any variety of state or local income-based surcharges. In general, taxpayers may deduct state and local income-based taxes on their federal income tax returns.
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