As of 2023, approximately 22 million Americans are working from home, enjoying the freedom of not being tied to a specific work location. This shift raises important questions about the future of payroll.
Managing payroll is relatively simple if your entire workforce is based in the same state as your company. However, many businesses employ workers across various states and even internationally, seeking the best talent to help their organizations thrive.
Payroll is already a complex subject, and when you add taxes into the mix, it becomes even more challenging with numerous acronyms, rates, forms, and questions to navigate.
Hiring a certified payroll specialist can simplify many of these complexities for your organization. But if you want more resources or simply want to learn more about handling payroll yourself, this guide will equip you with the knowledge to tackle various types of payroll taxes like a pro.
What are Payroll Taxes?
Payroll taxes are financial liabilities imposed by the federal or state government on employers. These taxes are calculated as a percentage of the wages paid to employees listed on the firm’s payroll. The amount is deducted from the employees’ wages before they receive their pay.
Payroll taxes serve as a significant source of revenue for the federal government, helping to address fiscal deficits. However, they are considered a regressive form of taxation, meaning they take a larger percentage from low-income earners compared to high-income earners.
Now that we’ve got a grasp on payroll taxes, let’s take a closer look at the different types of payroll taxes that make up this system.
Types of Payroll Taxes in the United States
In the US, payroll taxes are a specific category of taxes that employers must manage and remit. However, it’s essential to distinguish between payroll taxes and other employment taxes, as the two terms are often mistakenly used interchangeably. Here’s a breakdown of the various types of payroll taxes associated with payroll:
1. Social Security Tax
Social Security tax is a fundamental component of the Federal Insurance Contributions Act (FICA). It is a shared responsibility between employers and employees, each contributing 6.2% of the employee’s wages, totaling 12.4%. This tax is applied only up to a specific income cap, known as the Social Security wage base, which for 2024 is $168,600. The revenue collected supports retirement benefits, disability insurance, and survivor benefits.
2. Medicare Tax
Medicare tax, another part of FICA, funds healthcare services like hospital insurance. Both employers and employees each contribute 1.45% of the employee’s wages, making a combined total of 2.9%. Unlike the Social Security tax, there is no income cap for Medicare tax. Additionally, there is an extra 0.9% Medicare tax for employees earning above certain thresholds ($200,000 for single filers, $250,000 for married couples filing jointly). Employers must withhold this additional tax from employees’ wages but are not responsible for contributing a matching amount.
3. Federal Unemployment Tax (FUTA)
FUTA is an employer-only tax that supports the federal unemployment compensation program. The standard FUTA rate is 6% on the first $7,000 paid to each employee annually. However, most employers receive a credit of 5.4% if they pay state unemployment taxes, reducing the effective FUTA rate to 0.6%.
4. State Unemployment Tax (SUTA)
State unemployment taxes are also primarily employer-only taxes, although some states require contributions from both employers and employees. These taxes fund state unemployment benefit programs. The rates and wage bases vary by state.
Explore more about the future of payroll solutions, including the integration of predictive analytics and automation, to get a better
Other Employment Taxes
Federal Income Tax
This tax is withheld from employees’ wages based on their earnings and withholding allowances. The amount varies according to the employee’s earnings and filing status.
State and Local Income Taxes
Similar to federal income tax, these are withheld from employees’ wages and vary by state and locality.
Self-Employment Tax
Self-employed individuals, such as freelancers, contractors, and small business owners, pay self-employment tax, which combines both the employer and employee portions of Social Security and Medicare taxes. The total rate is 15.3%, with 12.4% for Social Security (up to the wage base) and 2.9% for Medicare. They are also subject to the additional 0.9% Medicare tax if their income exceeds certain thresholds.
Now, let’s understand this better through an example:
Example of Payroll Tax Calculation
To illustrate the practical application of payroll taxes, consider Gemma, an employee at Black PLC with an annual salary of $60,000 as of March 31, 2022. Her payroll tax contributions would be as follows:
Employee’s Contribution:
- Social Security: 6.2% of $60,000 = $3,720
- Medicare: 1.45% of $60,000 = $870
- Total Employee Contribution: $3,720 + $870 = $4,590
Employer’s Contribution:
- Social Security: 6.2% of $60,000 = $3,720
- Medicare: 1.45% of $60,000 = $870
- Total Employer Contribution: $3,720 + $870 = $4,590
Total Contribution to FICA:
- $4,590 (Employee) + $4,590 (Employer) = $9,180
Thus, a total payroll tax of $9,180 is remitted to the government on behalf of both the employer and Gemma.
Summing Up
Understanding the different types of payroll and employment taxes is crucial for compliance and financial planning. Employers must accurately calculate and remit these taxes to avoid penalties and ensure proper funding of social insurance programs.
For further assistance, consider collaborating with Procloz- a leading technology-driven company specializing in global payroll services, making it easier to manage your multinational workforce. Contact us today.
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