Payroll taxes in U.S.Before considering the payroll taxes we need to talk about the Basic Formula for the Net Pay. Basically from gross pay is subtracted one or more deductions to arrive at the Net Pay. In fact Employee's gross pay (pay rate times number of hours worked, including any over time) minus payroll tax deductions, minus voluntary payroll deductions, is equal to Net Pay. As you can see payroll tax deductions play a critical role and just because they are provided by law we can call them Statutory payroll tax deductions.
The employer must withhold payroll taxes from an employee's check and hand them over to several tax agencies by law. Payroll taxes include:
1.Federal income tax withholding, based on withholding tables in "Publication 15, Employer's Tax Guide"[2] by Internal Revenue Service - IRS;
2.Social Security tax withholding.[3] The employee pays 6.2 percent of the salary or wage, up to 110,100 (as of 2012). The employer also pays 6.2 percent in Social Security taxes. If you are self-employed, you pay the combined employee and employer amount of 12.4 percent in Social Security taxes on your net earnings;
3.Medicare tax.[4] The employee pays 1.45 percent in Medicare taxes on the entire salary or wage. The employer also pays 1.45 percent in Medicare taxes. If you are self-employed, you pay the combined employee and employer amount of 2.9 percent in Medicare taxes on your net earnings;
4.State income tax withholding;
5.various local tax withholding, such as city taxes, county taxes, school taxes, state disability, and unemployment insurance.
As for the sources considered as references we can mention the following publications:
Publication 15, (Circular E), Employer's Tax Guide. This publication explains employer's tax responsibilities. It explains the requirements for withholding, depositing, reporting, paying, and correcting employment taxes. It explains the forms any employer must give to its employees, those employees must give to the employer, and those employer must send to the IRS and SSA (Social Security Administration). This guide also has tax tables needed to figure the taxes to withhold from each employee;
Publication 15 - A, Employer’s Supplemental Tax Guide. This publication supplements Publication 15 (Circular E), Employer’s Tax Guide. It contains specialized and detailed employment tax information supplementing the basic information provided in Publication 15 (Circular E);
Publication 15-B. Employer's Tax Guide to Fringe Benefits. This publication supplements Publication 15 (Circular E), Employer’s Tax Guide, and Publication 15 - A, Employer’s Supplemental Tax Guide. This publication contains information about the employment tax treatment of various types of noncash compensation.
In the earlier part we have considered payroll taxes related to employee's side. Now it's the moment to talk about the Employer Payroll Taxes Employers are responsible for paying their portion of payroll taxes. These payroll taxes are an expense over and above the expense of an employee's gross pay. The employer-portion of payroll taxes include the following:
1.Social Security taxes (6.2% up to the annual maximum);
2.Medicare taxes (1.45% of wages);
3.Federal unemployment taxes (FUTA);
4.State unemployment taxes (SUTA).
Very often you can hear people using FICA in their terminology. FICA stands for the Federal Insurance Contributions Act and the FICA tax consists of both Social Security and Medicare taxes. As we explained earlier both parties pay half of these taxes. Employees pay half, and employers pay the other half. Social Security and Medicare taxes are paid both by the employees and the employers. In summary together both halves of the FICA taxes add up to 15.3 percent.
Any employer is responsible for paying the employer's share of payroll taxes, for depositing tax withheld from the employees' paychecks, preparing various reconciliation reports, accounting for the payroll expense through their financial reporting, and filing payroll tax returns. As you see this suite of employer payroll tax responsibilities is far above issuing paychecks to employees.
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Dilshad Ali