Define Payroll Taxes
Payroll taxes are the employment taxes that an employer and an employee are required to pay. The Internal Revenue Service administrates the federal withholding laws. State agencies vary by tax and state. An employee pays her taxes via tax withholding -- her employer deducts it from her wages before she's actually paid. An employer pays its own, and the employee's, taxes to the respective agencies.
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Types
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The federal government requires employees to pay federal income tax, Social Security tax and Medicare tax and employers to pay federal unemployment tax, Social Security tax and Medicare tax. Most states require employees to pay state, or personal, income tax; the state taxation or revenue agency oversees state income tax laws. Some cities require employees to pay city income tax and some local governments require local income tax payment. Less commonly, state disability insurance might apply.
Significance
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Social Security tax provides benefits to qualified disabled individuals and their dependents, and retirees and their dependents. Federal income tax fund national programs, such as foreign affairs, defense, law enforcement and community development.
State, city and local income tax fund related programs, such as public education, transportation, health, and correctional and rehabilitative facilities. State disability insurance provides temporary benefit payments to workers who incur off-the-job illnesses or disabilities. Federal and state unemployment taxes provide temporary financial assistance to eligible employees who lose their jobs.
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Employee Calculations
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An employer uses the employee's W-4 form and IRS Circular E's withholding tax tables to compute the amount of federal income tax to withhold from his paychecks. As of 2011, the employer calculates Social Security tax at 4.2 percent of the employee's taxable income, up to $106,800 for the year, and Medicare tax at 1.45 percent of all his taxable income.
The employer applies its state withholding regulations to calculate state income tax. For example, the state might use a system similar to federal income tax or require a flat withholding percentage. City and local income tax withholding varies by jurisdiction; the employer can consult its state revenue agency for withholding procedures or directions on where to obtain them. State disability insurance also varies. For example, in California, an employer withholds a percentage of the employee's taxable wages, up to a certain amount for the year.
Employee Calculations
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As of 2011 and before July 1, an employer calculates federal unemployment tax at 6.2 percent of the first $7,000 it pays to each worker; after June 30, it pays 6 percent. If it paid its state unemployment tax on time, the federal unemployment tax rate drops to 0.8 percent and 0.6 percent, respectively.
State unemployment tax rates and annual wage base varies by state and employer. Generally, new employers are assigned a specific rate; once the employer has been in business for a certain period, the state unemployment office assigns it an experienced rate. As of 2011, an employer pays Social Security tax at 6.2 percent of taxable income paid to employees, up to $106,800 for the year, and Medicare tax at 1.45 percent of all taxable income.
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