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What are Payroll taxes?
Payroll taxes are the taxes paid on employees’ salaries to finance social insurance programs. Both employees and employers pay a similar share of Social Security and Medicare taxes.
Payroll taxes are filed with the IRS (Internal Revenue Service) via forms like the W-2, W-3, and Form 940.
Examples of payroll taxes are:
- FUTA ( Federal Unemployment Tax Act )
- Withholding taxes
- FICA ( Federal Insurance Contributions Act, Social Security Tax)
- MEDFICA (Medicare Federal Insurance Contributions Act)
The different social insurance programs are:
- Social security
- Medicare
- Unemployment insurance
Taxes are deducted from employees’ paychecks and paid by the business to the government. Federal, state, and local income taxes are included.
In the U.S, the tax percentage is 15.3% as combined from employee and employer to fund various social programs such as Social security and medicare.
Payroll taxes are collected by federal and state governments. The government uses revenue from payroll taxes to fund programs such as healthcare, social security, and workers’ compensation.
Types of Payroll taxes
Federal Income Tax
The Internal Revenue Service imposes a tax on all earnings contributing to a taxpayer’s taxable income, which is known as federal tax. The federal government collects the federal income tax.
In order to file the federal income tax, you need to complete the Form W-4. Employers want their employees to use the Tax Withholding Estimator tool to estimate the federal income tax.
It refers to the tax collected by the U.S. government to fund the Social Security program and is formally entrusted with two security trust funds. The two security trust funds are the Federal Disability Insurance (DI) Trust Fund Federal Old-Age and the Survivors Insurance (OASI) Trust Fund.
Social Security is supported primarily through payroll taxes, which are called the Federal Insurance Contributions Act (FICA) or the Self-Employed Contributions Act (SECA).
The Social Security tax is separated into 6.2% that is visible to employees (as the “employee contribution”) and 6.2% that is visible only to employers (as the “employer’s contribution”).
Medicare Tax
It refers to the mandatory payroll tax, which funds medical, hospital, and hospice care to people after the age of 65, as well as for people with disabilities and certain illnesses.
The Medicare tax goes into two different funds: the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund.
The Medicare tax is a fair and equitable system, with both the employer and employee contributing 1.45%, totaling 2.9%. For individuals who earn over $200,000, an additional 0.9% is charged.
Federal Unemployment Tax
It refers to the tax that is imposed on employers to fund employment. This tax is only implemented for employers. A company becomes subject to FUTA (Federal Unemployment Tax Act) if it meets the following conditions:
- If a company pays employees wages of more than $1,500 in any calendar quarter during the year.
- One or more employees worked part of a day in twenty or more weeks during the year.
State Unemployment Tax
When an eligible worker is fired unwillingly (for any reason other than gross misconduct or leave), the state is required to provide unemployment compensation.
States charge employers an unemployment tax to help pay for this burden. Employers’ rates are determined by their experience with filing claims, just like in the case of insurance.
The tax rate on these employers rises in proportion to the number of claims filed by former workers. The state notifies an employer each year of its tax rate, which is always subject to a minimum amount.
Payroll Tax Forms
| Payroll Tax Forms as Mandated by IRS | ||
| S.No. | Form Name | Description |
| 1 | W-2 | The W-2, Wage, and Tax Statement is an IRS form that employers must send to an employee and the IRS every year. |
| 2 | Form 941 | Form 941, Employer’s Quarterly Federal Tax Return, is used to report social security tax, income tax, or Medicare tax. |
| 3 | W-4P | W-4P, a Withholding Certificate for Periodic Pension or Annuity Payments, is a form where the payer can withhold the correct amount of federal income tax. |
| 4 | Form 8959 | Form 8959, Additional Medicare Tax, is used to determine the amount of additional Medicare tax you owe and the amount withheld by your employer ( if any ). |
| 5 | Form 1042-T | Form 1042-T, Annual Summary and Transmittal of Forms 1042-S is used to transmit paper Form 1042-S. |
| 6 | Form 944 | Form 944, Employer’s Annual Federal Tax Return, is for the smallest employers who will file and pay taxes annually instead of quarterly. |
What are Payroll Tax amounts?
It refers to the amount that is charged or levied on the employer’s payroll.
These payroll tax amounts help the government fund social programs like Medicare and Social Security, which support disabled people or retired people.
The amount deducted from each employee’s paycheck is determined by the information they provided on their W-4 form at the time of employment. The amount that should be deducted from each paycheck to pay federal income taxes is explained on this form.
Federal Payroll Tax rate
- Social Security tax rate: 6.2% for the employee + 6.2% for the employer
- Medicare tax rate: 1.45% for the employee + 1.45% for the employer
- Additional Medicare: 0.9% for the employee when wages exceed $200,000 in a year
- FUTA tax rate: 6% for the employer on the first $7,000 paid to the employee
Penalties for Late payments or Missed payments
If you fail to deposit the employment tax you owe on time, the IRS (Internal Revenue Service ) sets a Failure to Deposit Penalty, which is a late fee. If there is a penalty you owe, the IRS will send you a notification.
Penalties for payroll taxes are:
- 2% of the unpaid amount in one to five days
- 5 % of the unpaid amount after six to fifteen days
- 10 % of the unpaid amount after more than 15 days
- 15% of the unpaid amount after more than 10 days after your initial notification
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Conclusion
Payroll taxes, which include FICA taxes for Social Security and Medicare as well as federal, state, and local taxes, are a significant part of companies’ and employees’ financial responsibilities.
These taxes, deducted from the worker’s salary, play a crucial role in our society’s financial system. These taxes support numerous initiatives, including workers’ compensation, Social Security, healthcare, defense spending, and government salaries.
