What Is a Payroll Tax?
A payroll tax is a interest withheld from an employee’s pay by an employer who pays it to the government on the employee’s behalf. The tax is based on wages, salaries, and tips paid to staff members. Federal payroll taxes are deducted directly from the employee’s earnings and paid to the Internal Revenue Service (IRS).
In the U.S., the relating to federal payroll taxes refers to the taxes deducted to fund Medicare and Social Security programs. These are marked as MedFICA and FICA on pay stubs. Federal income tax, which also is withheld from employee paychecks, goes into the unspecific fund of the U.S. Treasury.
Most states and some cities and counties impose income taxes as well, and these amounts are paid speedily to their coffers. In addition, employers, but not employees, also pay federal unemployment taxes for each of their employees.
Different from the U.S. income tax, which is a progressive tax, payroll taxes are levied only up to a certain yearly limit. Any income that oversteps that limit, set at $137,700 in 2020, is untaxed, making the U.S. payroll tax a regressive tax.
Key Takeaways
- Payroll taxes are withheld from every worker’s salary and remitted to the federal government.
- In the U.S., payroll taxes are used to fund Social Security and Medicare.
- Payroll encumbrances are used for specific programs. Income taxes go into the government’s general fund.
- An executive order issued by President Trump in August 2020 tabled payroll taxes from Sept. 1 through Dec. 31, 2020, for Americans earning less than $100,000 per year. The scots will have to be paid next year.
Understanding Payroll Taxes
Payroll taxes in addition to income pressures are collected by federal authorities and some state governments in many countries, including the United States. These payroll tax decreases are itemized on an employee’s pay stub. The itemized list notes how much is withheld for federal, state, and municipal income tolls as well as the amounts collected for Medicare and Social Security payments.
Governments use revenues from payroll taxes to reservoir specific programs including Social Security, healthcare, and workers’ compensation. Local governments may collect a relatively paltry payroll tax to maintain and improve local infrastructure and services, including first responders, road maintenance, and parks.
Unemployment Customs
Employers bear the primary responsibility for funding unemployment insurance. If they lay off employees, those employees are entitled to unemployment improves. The rate of unemployment insurance the employer will pay varies by industry, state, and federal fees. Some states lack employees to contribute to unemployment and disability insurance.
Federal payroll taxes cover Social Security and Medicare contributions, which constitute the Federal Protection Contributions Act (FICA) tax. An employee pays 7.65%. This rate is divided between a 6.2% deduction for Social Security on a most salary of $137,700 and a 1.45% share for Medicare.
There is no salary limit on Medicare, but anyone who earns more than $200,000—or $250,000 for wedded couples filing jointly—pays another 0.9% for Medicare.
The premise of Social Security and
Employees pay 6.2% into Sexually transmitted Security for the first $132,000 earned, and another 1.45% into Medicare on all wages.