Does a Base Salary Subtract Payroll Taxes?

Employees who receive wages or salaries are subject to payroll taxes under federal and, if applicable, state law. Federal employee taxes include federal income tax, Medicare tax and Social Security tax. Most states charge employees state income tax; sometimes, city and/or local income tax applies as well. In some cases, taxes are withheld from base salary.

Identification

Base salary represents an employee's earnings before incentives, such as medical and health benefits, are applied. Salary is a predetermined amount of pay that the employee receives weekly or on a less frequent basis, such as biweekly or semimonthly. The salary can be all or part of her pay, but it must be an amount she can count on each payday. Base salary is a stand-alone amount and does not include bonuses or commissions the employee may receive.

Determination

The employer subtracts payroll taxes from base salary if the salary represents the employee's gross taxable wages. For example, pretax deductions, such as traditional 401k plans and medical and dental plans that meet IRS Section 125 code requirements, are subtracted from base salary before federal, and in most cases state, payroll taxes are withheld, thus reducing the employee's taxable salary. If the employee does not have pretax deductions, payroll taxes are withheld from base salary. An exception may apply, as when the employee receives a bonus that is paid in the same check as his base salary; this increases the employee's gross pay. In this case, taxes are based on the salary and bonus amount instead of solely on salary.

Federal Calculations

In 2011, an employee's taxable salary is subject to 4.2 percent for Social Security tax, up to the yearly wage limit of $106,800, and 1.45 percent for Medicare tax, which has no annual wage limit. Her federal income tax withholding depends on the filing status and allowances she claims on her W-4 form, and on the Internal Revenue Service's Circular E withholding tax table that's relevant to her salary, allowances, filing status and pay period.

Additional Calculations

If state income tax applies, the employer calculates the withholding according to its state revenue agency's guidelines. In many cases, the state uses a system comparable to federal income tax withholding. The employer should also consult its state agency for a list of pretax deductions that can be withheld from salary before withholding state income tax. The state revenue agency can advise on how to withhold city and/or local income tax from salary, if applicable. To figure school district tax, for example, an employer uses the same salary and withholding exemption certificate used to determine the employee's Ohio income tax withholding, plus the school district withholding tax tables.

References

• Internal Revenue Service: Publication 15 (Circular E: Employer's Tax Guide)
• Money-Zine: Base Salary
• Money-Zine: FICA Tax
• Internal Revenue Serivce: FAQs for Government Entities Regarding Cafeteria Plans
• Patriot Software: What Are Taxable Wages?
• Ohio Department of Taxation: Expirations, New School Districts, Renewals and Rate Changes

Resources

• Internal Revenue Services: State Revenue Sites