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Payroll Taxes

Both the state and federal government assess payroll tax on both the employer and the employee. Some taxes, such as Social Security, are paid by both. Others, such as federal, state, or locality income tax, are paid by the employee. Still others, such as federal unemployment, are paid solely by the employer.

Definition of Taxable Income

Usually, federal and state governments consider the following as taxable wages for both income tax and Social Security and Medicare tax:

  • Gross earnings from employment
  • Some forms of group life insurance
  • Third party sick pay
  • Some forms of employer allowances

In addition to the regular deposit dates, there are additional dates for forms reporting. The IRS website provides a comprehensive list of all the deadlines they require for employer payroll taxes and forms.

Federal Income Tax

Federal payroll taxes are assessed on the employee’s income. The rate of federal withholding depends on the employee’s wage, filing status, and the number of exemptions claimed. Employers deduct federal payroll taxes from their employees’ paychecks and then deposit the taxes either weekly, monthly, quarterly, or annually, depending on the size of the payroll. Usually, the deposit is made with the employer’s banking institution, which then forwards the money to the IRS. The federal withholding status also determines the withholding status for state income taxes.

The IRS provides a comprehensive guide for employers, which is called Publication 15 and it details what constitutes taxable wages, what constitutes an employee, and so forth. The guide is downloadable in pdf form.

Social Security and Medicare Taxes

Social Security and Medicare payroll taxes are paid jointly by the employer and the employee based on a percentage set by the Social Security Adminstration; Social Security and Medicare have an income cap for withholding. The rate has remained stable since 1990 and is now 6.2 percent for Social Security and 1.45 percent for Medicare; this is a total of 7.65 percent that’s withheld from each employee’s paycheck.

As of January 1, 2013, some employees in the higher wage brackets were assessed an additional 0.9 percent Medicare tax, depending on their income level. Social Security taxes are assessed by the federal government only, individual states don’t collect Social Security or Medicare taxes.

Taxable Income Expert

Social Security and Medicare Taxes

Social Security and Medicare payroll taxes are paid jointly by the employer and the employee based on a percentage set by the Social Security Adminstration; Social Security and Medicare have an income cap for withholding. The rate has remained stable since 1990 and is now 6.2 percent for Social Security and 1.45 percent for Medicare; this is a total of 7.65 percent that’s withheld from each employee’s paycheck.

As of January 1, 2013, some employees in the higher wage brackets were assessed an additional 0.9 percent Medicare tax, depending on their income level. Social Security taxes are assessed by the federal government only, individual states don’t collect Social Security or Medicare taxes.

Federal Unemployment Tax, or FUTA

Employers are assessed a federal unemployment tax, employees are not liable for paying it. FUTA is paid separately from federal income tax and Social Security tax and has a cap on the amount assessed, usually the first $7,000 of an employee’s wages.

For more information on federal payroll taxes as well as the current rate, click here.

State Income Tax

State payroll taxes are withheld from each employee’s paycheck and deposited to the state treasury periodically, similarly to federal taxes. The reporting frequency is determined by the size of the payroll.Rates for income tax vary by state and a comprehensive list of both state withholding and SUTA can be found here.

State Unemployment Tax, or SUTA

Most states require employers to pay state unemployment tax. Like FUTA, SUTA is not paid by the employee and has a cap on the amount assessed, which varies by state. Employers are required to maintain a minimum deposit with the state treasury so that they can pay unemployment insurance to those employees who have terminated and are eligible to collect unemployment compensation. The initial deposit is separate from the SUTA payments that must be made at the beginning of the year.

For more information on state payroll taxes and rates, click here or here.

Self-Employment Tax

Individuals who are self-employed are subject to both halves of the Social Security and Medicare tax. The part typically paid by the employer is called self-employment tax and is usually taken as a deduction against the taxable income of the business.

Reporting Employer Payroll Taxes

Accurate reporting of employer payroll taxes is essential so that at the end of the year, employees receive accurate W-2 forms. Many times, a W-2 will be returned for an error such as in the name or the Social Security number.

The Social Security Administration provides two verification options for ensuring the accuracy of both names and Social Security numbers in order to avoid errors. Click here to access the name and Social Security number verification tool on the Social Security Administration’s website.

Reporting Employer Taxes
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