Payroll Tax

Payroll taxes are withheld from employees' earnings by employers, who are responsible for remitting both the employee's and employer's portions to the appropriate government agencies. 

For example, in the United States, an employee earning an annual salary of $50,000. The employer would withhold federal income tax, Social Security tax, and Medicare tax from the employee's paycheck. Additionally, the employer would contribute an equal amount for Social Security and Medicare taxes, along with federal unemployment tax, all of which are calculated based on the employee's wages.​

Payroll Tax vs Income Tax

While both payroll and income taxes contribute to government revenue, they differ in their application and purpose. Income tax is a progressive tax levied on an individual's total earnings, with rates increasing as income rises. In contrast, payroll taxes are specifically designed to fund social programs and are calculated based on wages, with fixed percentages applied up to certain income thresholds.​

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Which Payroll Taxes Are Paid by Employers?

​In the United States, employers are responsible for several payroll taxes, which include contributions to Social Security, Medicare, and unemployment insurance. These taxes are in addition to any income tax withholdings and are typically calculated and paid on a per-pay-period basis.

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1. Social Security and Medicare Taxes (FICA):

Under the Federal Insurance Contributions Act (FICA), employers and employees each contribute:​

• Social Security Tax: 6.2% of each employee's wages, up to an annual wage base limit.​
• Medicare Tax: 1.45% of all employee wages, with no wage base limit.​

An additional 0.9% Medicare tax applies to employee wages above $200,000, but this extra tax is solely the employee's responsibility. ​

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2. Federal Unemployment Tax (FUTA):

Employers pay a federal unemployment tax of 6.0% on the first $7,000 of each employee's annual wages. However, most employers are eligible for a credit of up to 5.4% for timely payment of state unemployment taxes, reducing the effective FUTA rate to 0.6%. ​

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3. State Unemployment Taxes (SUTA):

In addition to federal unemployment taxes, employers must pay state unemployment taxes, which vary by state. These taxes fund state unemployment insurance programs and are calculated based on state-specific rates and wage bases.

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How To Calculate Payroll Tax?

Calculating payroll taxes in the United States involves determining both the employee and employer contributions to various taxes. Here's a step-by-step guide:

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1. Federal Income Tax Withholding

Employers are required to withhold federal income tax from employees' wages based on the information provided on their Form W-4. The amount withheld depends on factors such as filing status, number of dependents, and any additional withholding allowances claimed. To calculate the federal income tax to withhold:​

• Obtain the Employee's Form W-4: This form provides the necessary information to determine the appropriate withholding.​
• Refer to IRS Withholding Tables: Use the tables provided in IRS Publication 15-T to find the correct amount to withhold based on the employee's earnings and filing status.​

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2. Social Security and Medicare Taxes (FICA)

Both employers and employees contribute to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).​

• Social Security Tax: Multiply the employee's gross wages by 6.2%, up to the wage base limit.
• Medicare Tax: Multiply the employee's gross wages by 1.45%.
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3. Federal Unemployment Tax (FUTA)

• Multiply the employee's annual wages (up to $7,000) by 0.6% (after applying any applicable state tax credits).​
• For example, if an employee earns $7,000 in a year, the FUTA tax would be $42.

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Employer Payroll Tax Requirements 

Employers must file various forms to report payroll taxes, including:​

• Form 941: Quarterly report of federal income tax withheld, Social Security, and Medicare taxes.​
  
  
• Form 940: Annual report of federal unemployment tax (FUTA).​
  
  
• Form W-2: Annual statement of wages paid and taxes withheld for each employee.​
  
  
• Form W-3: Transmittal form summarizing all W-2 forms filed.

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Simplify Your Payroll Taxes with Playroll's Compliance Solutions

For businesses, utilizing tools like Playroll can streamline payroll processing, ensuring accurate tax calculations and compliance with federal, state, and local regulations. By using Playroll, you're able to simplify payroll management, reduce administrative burdens, and focus on growing your business. For more information, book a demo and access our various offerings tailored for businesses.​