What Is the Rate to Calculate for Payroll Tax?
Payroll tax requirements exist on a federal and state level; the criteria often change from year to year. On occasion, city and local payroll taxes apply. The Internal Revenue Service administers federal payroll tax laws; the state revenue/taxation administers most state payroll tax laws. The employer calculates payroll tax according to the type of tax and the rate the respective agency requires.
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Identification
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Employees are required to pay federal payroll taxes, which include federal income tax, Social Security tax and Medicare tax. Most states require employees to pay state income tax; in rare cases, state disability insurance may apply. In a few instances, the city or local government requires employees to pay city or local income tax. Employees pay these taxes via the withholding process, in which their employer withholds the taxes from their wages.
Employers are required to pay the following federal payroll taxes: Medicare tax, Social Security tax, and federal unemployment tax. Most states require that they pay state unemployment tax. On occasion, state disability insurance and/or a job training tax may apply.
Employee Calculations
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To determine employee federal income tax withholding, the employer uses the employee's W-4 form and IRS Circular E. Specifically, federal income tax withholding depends on the employee's filing status and allowances shown on her W-4 and the Circular E's withholding tax table relevant to her filing status, allowances, income and pay period. The employer calculates Social Security tax at 6.2 percent of gross income, up to the annual wage maximum of $106,800; and Medicare tax at 1.45 percent of all gross compensation, as of 2010.
The employer figures state income tax withholding based on the state revenue department's guidelines. The state of Florida, for example, does not require this withholding; but the state of Georgia requires that the employer use the employee's state withholding allowance certificate and the state withholding tax tables to figure state income tax. If city or local income tax applies, the employer can obtain the rates from the state taxation agency. If applicable, it can contact the state employment department (names vary by state) for the state disability insurance tax rate and annual wage base.
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Employer Rates
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The employer pays the same amount for Social Security and Medicare taxes as the employee. The employer calculates federal unemployment tax at 6.2 percent of the initial $7,000 paid to each worker, and at 0.8 percent if it paid its state unemployment tax on time. It calculates state unemployment tax according to the state annual wage limit and the tax rate the state sends the employer each year. If job training tax or state disability insurance applies, the employer calculates the tax according to the state annual wage base and the rate the state sends it each year. While job training tax typically has a standard rate for the year that applies to each employer, state unemployment tax rate largely depends on how long the employer has been in business and the number of former employees who have drawn unemployment benefits.
Considerations
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The employer pays all federal payroll taxes to the IRS according to the payment schedule outlined in the Circular E. The employer can obtain payment procedures for state, city and local payroll taxes from the state taxation agency.
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