What Are the Percentages for Payroll Taxes?
Small businesses withhold and pay a variety of payroll taxes based on the amounts of employee paychecks. Some of these taxes are consistent percentages for all employers in all states. Others are based on percentages that vary based on the employee's earnings or the state where the employer operates his business.
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Federal Income Tax
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Employers must withhold federal income tax from employee paychecks based on information that an employee provides on the W4 form that he is required to fill out when he first starts a job, and again if his tax withholding situation changes, such as if he marries or has a child. This form asks for information about his filing status, such as whether he is married or single, as well as the number of withholding allowance to which he believes he is entitled. The greater the number of withholding allowances an employee claims, the less money his employer takes out of his paycheck. The information on each employee's W4 form corresponds to columns on pages of the IRS Employer's Tax Guide, which employers use to determine withholding amounts for each employee for each pay period.
FICA Tax
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FICA taxes are Social Security and Medicare taxes that employers withhold from employee paychecks and then supplement with mandatory employer contributions. As of 2011, employers must withhold 4.2 percent of each employee's earnings, up to a maximum taxable amount of $106,800 per employee per year. Employers must also withhold 1.45 percent of each employee's earnings for Medicare tax (as of 2011). There is no maximum amount of employee earnings subject to Medicare withholding.
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State Taxes
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The percentage that employers must withhold for state income tax varies from state to state. Some states, like Washington state, do not have an income tax at all. In addition, employers must pay state unemployment insurance and industrial insurance, and some states allow employers to withhold a small percentage of these taxes from employee paychecks. Withholding amounts vary by state.
Reconciliation
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Income taxes are deducted from employee paychecks each week, but each individual's tax liability is ultimately based on his earnings for the entire year. When the employee files his annual income tax return, he must reconcile the entire amount that he owes for the year with the total amount that his employers have taken out of his checks. If his employers have take out too much money, he will be due for a refund. If his employers have taken out too little money, he must pay the difference when he submits his tax return.
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