Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff. Payroll taxes generally fall into two categories: deductions from an employee’s pay (for example, Social Security and Medicare taxes) and taxes paid by the employer based on the employee’s salary (for example, unemployment insurance taxes).
In the United States, payroll taxes are assessed by the federal government, most state governments, and some local governments. The federal government levies payroll taxes to fund Social Security and Medicare, which provide income and health care benefits to retirees, disabled persons, and families of deceased workers. State and local governments may impose payroll taxes to fund various programs and services, such as unemployment insurance and public assistance.
How Payroll Taxes are Calculated
Payroll taxes are typically calculated as a percentage of an employee’s wages or salary. For federal payroll taxes, the employee’s share is usually 6.2% for Social Security and 1.45% for Medicare, with employers paying a matching amount for each. Some states also impose payroll taxes, with the rate and base varying by state. For example, in California, employers must pay 1.25% of an employee’s wages or salary to the state unemployment fund.
Additional Payroll Taxes
In addition to the federal and state payroll taxes, some local governments also impose payroll taxes. For example, in New York City, employers must pay a payroll tax of up to 8.85% of an employee’s wages or salary. This tax is used to fund the city’s unemployment insurance, disability benefits, and other programs.
In addition to taxes imposed on employers and employees, some employers must also pay additional payroll taxes, such as the FUTA tax. This tax is used to fund unemployment insurance and is calculated as a percentage of the first $7,000 of an employee’s wages or salary. Employers in some states may also be required to pay a state unemployment insurance tax.
Exemptions from Payroll Taxes
In some cases, employers may be exempt from certain payroll taxes. For example, some employers may be exempt from the FUTA tax if they have a low rate of unemployment claims. In addition, employers may be exempt from some state payroll taxes if they have a small number of employees or if they are a nonprofit organization.
Employees may also be exempt from certain payroll taxes if they meet certain criteria. For example, employees who earn less than a certain amount may be exempt from Social Security and Medicare taxes. In addition, employees who are members of certain religious organizations may be exempt from Social Security and Medicare taxes.
Payroll Tax Credits
In some cases, employers may be eligible for payroll tax credits. These credits can reduce the amount of taxes that employers must pay. For example, employers may be eligible for credits for providing health insurance for their employees or for hiring certain types of employees, such as veterans or individuals with disabilities.
Employees may also be eligible for payroll tax credits. For example, employees who are parents may be eligible for the Child Tax Credit, which reduces their taxes by up to $1,000 per child. In addition, employees may be eligible for other credits, such as the Earned Income Tax Credit, which reduces their taxes by up to $6,660.
Conclusion
Payroll taxes are taxes imposed on employers or employees, and typically consist of Social Security and Medicare taxes. In addition to federal payroll taxes, some states and local governments also impose payroll taxes. Employers may be eligible for credits to reduce their payroll taxes, and employees may be exempt from certain payroll taxes or eligible for credits to reduce their taxes.
