What to Know About Payroll Taxes

What is payroll tax and how might it impact your overall earnings and obligations as a federal and state (and possibly local) taxpayer? It’s a question that you may be asking yourself, especially if you’re wondering why the amount of money in your paycheck is less than your actual salary. Below, you’ll find a helpful payroll tax definition and rundown of what payroll taxes are exactly, as well as how they work and impact employees’ wages and tax liabilities overall.

What is Payroll Tax?

The short answer is that payroll tax is a portion of wages, salaries and tips that’s withheld to pay for government programs like Medicare and Social Security, as well as local, state and federal taxes. Both employees and employers pay for a portion of these levies, which explains why your take-home pay is always less than what you’ve technically earned on the job via your annual salary. By way of contrast, when considering income tax vs. payroll tax, it helps to note that income tax is paid exclusively via employees.

Types of Payroll Taxes

Several types of costs are rolled directly into payroll taxes, by definition, which are shouldered by both you and your current job provider.

• Social Security: Payments made to cover Social Security taxes, which in turn provide a source of recurring income for certain citizens, especially those who could use help funding their lifestyle and expenses in old age.
• Medicare: Also included are expenses for Medicare taxes, which help elderly individuals cover various health care-related costs at a stage of life when they’re often most in need of additional medical care.
• Unemployment insurance: A required tax that is typically paid by your employer to help pay for individuals who are out of work nationwide. However, certain states require employees to make a certain contribution by law, with funds going to offset expenses related to those experiencing periods of unemployment.
• Self-employment: As the name indicates, self-employment taxes are paid by the self-employed on monies earned for work that they’ve independently performed. Unlike traditional payroll taxes, the employer does not contribute half of Medicare and Social Security taxes, meaning that self-employed individuals often need to do added budgeting to ensure that these expenses are covered.

How Does Payroll Tax Work?

In the case of employees, payroll taxes are withheld from their paychecks and furnished to the government by the company that employs them. Withholdings include local, state, and federal taxes as well as the individual employee’s portion of Medicare and Social Security (FICA) taxes.

Self-employed individuals will instead make sole contributions where required by local, state and federal government mandates. As a result, the amount of money that you’ll take home in any given pay period will be less than you’ve earned as part of your overall salary and wages.

Payroll Tax Rates

Below, you’ll find more detailed information on local, state and federal payroll rates that may apply to employers and employees alike.

Federal Payroll Tax Rates

Let’s begin by taking a closer look at 2024 payroll tax rates for Medicare and Social Security.

Under current FICA taxes, both employees and employers pay 6.2% towards Social Security and 1.45% towards Medicare (a total of 7.65% percent each or 15.3%, collectively). Self-employed workers are obligated to pay the 15.3% total amount themselves.

A wage limit of $168,600 applies to the Social Security part of FICA taxes, after which no further payments are required. As for Medicare portions, upon reaching $200,000 in your annual wages, you’ll find that taxable burdens will drop to 0.9%, at which time you will receive no further reductions in tax rate. However, be advised that there is not an earnings limit on Medicare payments.

Federal unemployment tax (FUTA) helps underwrite the cost of financial assistance for workers around the nation who are currently unemployed. FUTA is paid by employers on employees whose earnings total more than $1,500 for any given calendar year. Employers pay 6% in taxes on the employee’s first $7,000 in income. Afterward, job providers are not required to make further FUTA tax payments.

State Payroll Tax Rates

As a taxpayer, you’ll want to check your state laws for information on your payroll tax rates. That’s because state unemployment taxes (SUTA) – which underwrite statewide unemployment benefits – vary by individual state.

While researching them, keep an eye out for minimum rates (the lowest that you can expect to pay), maximum rate (the highest that you’ll pay in SUTA taxes) and wage base (the threshold at which SUTA tax payments stop). Note that the SUTA wage base typically exceeds the $7,000 threshold for FUTA tax payments.

Local Payroll Tax Rates

As alluded earlier, depending on where you reside and work, local payroll taxes may apply in certain ZIP codes, counties, and municipalities throughout the United States. Taxpayers interested in learning more are encouraged to research their local payroll tax rates, as these expenses can ultimately impact your take-home pay.

Payroll Tax vs. Income Tax

Payroll taxes are based on a flat rate that is paid by everyone … and are payable up to a maximum yearly cap. On the flip side, income taxes are progressive, meaning that they vary by an individual’s earnings and are based on each taxpayer’s specific income bracket.

Payroll Tax FAQs

Answers to several of the most frequently asked questions (FAQs) surrounding payroll taxes can be found below.

What is FICA Tax? The Federal Insurance Contributions Act (FICA) mandates the need for employees to contribute to federal payroll taxes covering Medicare and Social Security contributions.

Which payroll taxes are paid by employers? Your employer typically pays a portion of FICA taxes and federal unemployment taxes. They’re also responsible for employment and income tax withholding, depositing payroll taxes with state, local and federal authorities, and making necessary filings to cover various payroll activities. Your employer functions as an agent of sorts for the government that effectively collects, files, and submits these taxes to local and federal authorities.

What is the payroll tax maximum in 2024?

For Social Security taxes, the maximum earnings base is $168,600. There is no maximum earnings threshold on Medicare, though it drops to 0.9% in payroll taxes upon your reaching $200,000 in annual income. State and local payroll taxes vary by individual locale.

The Bottom Line

Payroll tax describes a percentage of salaries, wages and tips that you or your employer will withhold and pay to local, state and federal government agencies. These taxes – which are split to a certain extent between employers and employees – go to cover various public programs such as Social Security and Medicare.

Because tax payments are required by law, your actual take-home pay will always be lower than your assigned salary. Understanding payroll taxes can help you get a better sense of how much of that money you’ll be bringing home each month, and how to budget accordingly.

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