What Is a Payroll Tax Rate?

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Federal and state law requires employers and workers to pay payroll taxes. A payroll tax rate is the formula federal or state law requires an employer or worker to use when calculating the respective tax. The Internal Revenue Service administrates federal payroll tax regulations; state revenue agencies vary by state.

Types

Federal income tax is a type of tax that is imposed on personal income. Medicare and Social Security taxes are forms of federal payroll taxes. Employees are required to pay these taxes via the withholding process — the employer withholds the tax at the respective rate from the employee’s paychecks. Federal law requires the employer pays its own share of Medicare and Social Security taxes plus federal unemployment tax. Most state law requires the employee to pay state income tax via the withholding process; on a more infrequent basis, city or local income tax or state disability insurance withholding may apply. The state requires the employer alone to pay state unemployment tax. In rare cases, state disability insurance or a job training tax may apply to employers.

Employee Rates

For tax year 2011, the Social Security withholding tax rate is 4.2 percent of gross income, up to $106,800 for the year; and 1.45 percent for Medicare tax. The federal income tax rate varies by employee — the withholding depends on the employee’s filing status, allowances, taxable wages and the IRS withholding tax tables. State income tax withholding rates also vary by state — the calculation process is often similar to that of federal income tax withholding. The payroll tax rate for city and local income tax also varies by location. Ohio’s school district payroll tax rate, for example, depends on the school district in which the employee resides. If applicable, the employer calculates state disability withholding according to the rate the state sets and the annual withholding limit.

Employer Rates

For tax year 2011, employers pay 6.2 percent of gross income, up to $106,800 yearly for Social Security tax; and 1.45 percent off all earnings for Medicare tax. The federal unemployment tax rate before July 1 is 6.2 percent and 6 percent after June 30. The rate drops to .8 percent and .6 percent, respectively, if the employer paid its state unemployment tax on time. The payroll tax rate for state unemployment tax varies by state; the rate usually depends on the amount of time the employer has been in business and the number of employees who have claimed unemployment benefits. Typically, the more benefits drawn, the higher the rate. State disability insurance and job training tax rates vary by state, but can also mirror each other. As of January 2011, the states of Arizona and California, for example, both charge employers a job training tax of .10 percent of the first $7,000 paid to each employee.

Considerations

Self-employed individuals are responsible for paying their own share of taxes directly to the IRS and the state. They pay the entire 10.4 percent for Social Security tax, up to $106,800 for the year, and 2.9 percent for Medicare tax.

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