Payroll Tax : Categories, Rates, Eligibility, Wage Limit & Calculation

What is Payroll Tax?

A payroll tax is a tax that both employees and businesses pay on salaries, tips, and wages. For employees, payroll taxes are deductible from their pay and given to the government by their employer. Federal, state, and local wage taxes, as well as the employee’s share of Social Security and Medicare taxes (FICA), are all part of payroll taxes. As an employer, you must pay your share of FICA taxes as well as federal and state unemployment taxes.

Geeky Takeaways:

• Payroll taxes are deducted from each employee’s salary and paid to the federal government.
• In the United States, payroll taxes fund Social Security and Medicare.
• Both employers and employees are required to pay an equal share of Social Security and Medicare taxes.
• Payroll taxes support government expenditures, specialized programs, Social Security, Medicare, municipal infrastructure, and other initiatives.

Categories of Payroll Tax

1. FICA (Social Security and Medicare Taxes)

The Federal Insurance Contributions Act, or FICA, is in charge of taxes like those for Social Security and Medicare. Payroll taxes for FICA go straight to the federal government to help pay for benefit programmes for retired workers, people whose spouses or children have died at work, people with disabilities, and other qualified people. Employees as well as employers are liable for this, and together they pay a total of 7.65%. The Social Security tax is based on salaries up to the current ceiling, which for 2024 is $1,88,600. The Medicare tax is based on salaries regardless of how much the employee earns.

2. Unemployment Insurance (UI) Taxes

The Federal-State Unemployment Insurance Program helps eligible employees and their families when they lose their jobs. It is paid for by the payroll taxes your company pays. These are the tax amounts for UI programs,

• The Federal Unemployment Tax Act (FUTA) says that employers must pay FUTA taxes on the first $7,000 that they give an employee each year. Most of the time, employers get a FUTA tax credit, which means they pay less overall than the usual percentage.
• If you pay taxes under the State jobless Tax Act (SUTA), the money goes to the jobless fund of your state. Employers only have to pay SUTA taxes in most states. But in a few states, employees also have to pay into the scheme.

3. Income Tax Withholding

Although income tax is withheld and remitted on your employees’ behalf, it is immediately deducted from their paychecks. The employee determines the precise amount. You will use their W-4 form to determine the amount of federal income tax to withhold. Because federal income tax is salary dependent, your tax liability increases as your income does. State income taxes differ; a flat tax is levied in certain states, while a graduated tax rate is used in most.

4. State and Local Payroll Taxes

Certain states mandate extra tax deductions. Consider the state of New York. Payroll taxes for paid family leave and state disability insurance are withheld by NY employers, in addition to some local tax laws that are exclusive to workers in Yonkers and New York City.

Payroll Tax Rates

Rate	Single	Married Filing Jointly	Married Filing Separately	Head of Household
10%	$0 – $11,600	$0 – $23,200	$0 – $11,600	$0 – $16,550
12%	$11,600 – $47,150	$23,200 – $94,300	$11,600 – $47,150	$16,550 – $63,100
22%	$47,150 – $100,525	$94,300 – $201,050	$47,150 – $100,525	$63,100 – $100,500
24%	$100,525 – $191,950	$201,050 – $383,900	$100,525 – $191,950	$100,500 – $191,950
32%	$191,950 – $243,725	$383,900 – $487,450	$191,950 – $243,725	$191,950 – $243,700

Objectives of Payroll Tax

Payroll taxes serve a variety of purposes, depending on the environment and policies of a given government. Here are some shared objectives:

1. Income Generation: One of the main objectives of payroll taxes is to provide income to the government. These taxes help to pay a variety of government programs and services, including social security, the Medicare program, unemployment insurance, and other welfare services.

2. Social Insurance Schemes: Payroll taxes frequently pay social insurance programs that provide financial assistance to people in specified situations, such as disability, retirement, or unemployment. These programs contribute to income security while safeguarding against financial hazards linked with specific life stages.

3. Healthcare Funding: In some nations, a portion of payroll taxes are set aside to fund medical services, such as Medicare in the United States. These funds help to provide health care and medical insurance to eligible individuals.

4. Distribution of Wealth: Payroll taxes can be aimed at redistribute wealth by levying more taxes on wealthier incomes while offering benefits or assistance to low-income individuals or specified demographic groups. This serves to reduce income disparity and enhance social equity.

5. Promoting Savings and Pension Planning: Some payroll tax systems contain facilities for retirement savings or pension schemes, which encourages people to save for retirement. Contributions to these programs are frequently tax deductible or given favourable tax treatment, motivating individuals to engage in retirement planning.

6. Labour Market Rules: Payroll taxes may impact labour market dynamics by increasing the cost of labour for companies. Higher payroll taxes may raise labour costs, influencing hiring decisions, salary levels, and labour participation rates.

Overall, payroll taxes serve multiple purposes, including revenue generation, social welfare provision, economic stability, and labour market regulation, among others. Payroll tax systems’ specific objectives and designs can change greatly between countries and jurisdictions due to their distinct economic, social, and political settings.

Who is Eligible to Pay Payroll Tax?

A payroll tax is charged on every employee and is deducted automatically from the salary they receive. Individuals contribute an equivalent amount to Social Security and Medicare, which are regressive in nature; conversely, the income tax is progressive, imposed at a greater rate on those earning more.

What are Wage Limits for Payroll Tax?

An annual highest limit is set by the Social Security Administration on the portion of an employee’s wages that is required to pay the Social Security tax. This is referred to as the benefit and contribution foundation, and it varies each year. The utmost wage amount liable to be subject to Social Security tax in 2024 is $1,47,000. Since the Medicare tax has no maximum taxable amount, emplyer and the employee would continue to divide the 2.9% tax on earnings in excess of $1,47,000, despite the fact that those earnings would no longer be subject to Social Security tax. Annual adjustments are also made to the wage base that is subject to federal and state unemployment taxes. The limit on wages subject to FUTA and SUTA taxes is determined by the respective wage bases.

How to Calculate Payroll Tax?

When a company first gets started with a few employees, it may handle payroll manually, including computing payroll taxes. However, as the company grows, it will likely become more feasible to outsource the function to a third-party payroll service or use software that automates the payroll process and scales with it. Still, it’s a good idea for any organization to understand the costs involved and the fundamentals of computing payroll tax, if only so that they can effectively budget for payroll. The first step is to figure out what percentage of an employee’s pay must be withheld for income taxes. The federal income tax withholding is computed using one of the following approaches: the wage bracket technique or the more complex percentage method. Both need details from an employee’s Form W-4, Employee’s Withholding Certificate, and gross pay.

1. Wage Bracket Method: The salary bracket method is used to calculate withholdings on salaries up to $100,000. It depends on the employee’s marital status and period of pay. The wage bracket method uses wage bracket tables to calculate exactly what amount of income tax to withhold. The particular calculation processes vary depending on whether the employee’s W-4 was issued before or after 2020.

2. Percentage Method: The percentage approach is used when an employee’s annual pay exceeds the maximum amount specified in the wage bracket method tables. This approach needs more computations than the wage bracket method, hence it is more frequently used by firms who use automatic payroll systems or external payroll service providers. The processes for computing payroll taxes using the percentage method, like those for determining wage brackets, differ depending on whether a W-4 was issued before or after 2000.

Payroll Tax – FAQs

Is the federal withholding tax a payroll tax?

Federal withholding is a tax calculated during payroll but is not considered a payroll tax. Instead, federal withholding is considered an employment tax. Federal withholding is often known as federal income tax.

Can businesses require employees to pay the full amount of FICA tax?

No. Employers are required by federal law to split FICA taxes fairly with their employees. Only self-employed people pay the full amount of Social Security and Medicare taxes.

In 2024, what is the employer FICA rate?

In 2024, the employer FICA rate is 7.65%. Self-employed individuals remit the complete 15.3% FICA tax, while employees contribute an additional 7.65%.

Did payroll taxes increase in 2024?

Since 1990, the payroll tax rate stays constant; however, the annual cap on the amount of income to which it can be applied varies. FICA charges an amount of 15.3%. Year to year, the wage base for different taxes, both federal and state, may vary.

What is the wage base limit?

A wage base limit is the highest amount of an employee’s annual income that is liable to certain payroll taxes (such as Social Security or unemployment). After an employee’s taxable wages reach that maximum, the employee is no longer subject to that tax for the remainder of the year. Excess wages are the wages obtained after an employee has exceeded a wage base limit.