The federal government levies payroll taxes on wages and uses most of the revenue to fund Medicare, Social Security, and other insurance benefits focusing on social development. Federal income taxes are also used to fund military and security projects.
State income taxes used to fund varieties of projects, the most important being health care and education, as well as transportation, rehabilitation, state police, parks, and recreation.
An employer can make payment online using the Electronic Federal Tax Payment System (EFTPS) after collecting federal withholding tax from employees. State agencies will normally have their own electronic or manual processes to remit state payroll taxes.
Not only this, but employers must also submit federal tax filings to the Inland Revenue Service, filings of the state payroll tax to the related state agency, and Form W-2s to be submitted at the Social Security Administration office.
There are typically four types of taxes that you’ll notice on your pay stub: federal income tax, Social Security tax, Medicare tax, and a state income tax (note that not all states have an income tax, some states may levy additional taxes, and some employees might be excluded from certain taxes).
Both the IRS and state tax agencies publish annual tables to determine the amount of tax to be withheld from each paycheck depending on the employee’s gross wages, filing status, a number of withholding allowances (exemptions) and payment frequency. Social Security and Medicare taxes put together are called “FICA” (Federal Insurance Contributions Act) taxes and have specific rates and thresholds.
For 2019, the Social Security tax rate is 6.2% on the first $132,900 of wages paid, up $4,500 from 2018. The Medicare tax rate is 1.45% on the first $200,000 of wages (plus an additional 0.9% for wages above $200,000).
We currently have about nine states in the U.S. that do not levy an income tax on wages:
New Hampshire and Tennessee don’t tax wages, but they do tax some dividends and interest income
Employee payroll taxes are usually made of these four taxes:
An employee’s paycheck generally consists of federal income tax, Social Security, and Medicare. If you are living in a state with state income tax withholding, you can decide to withhold state income tax also.
Social Security is calculated at 6.2% of the gross pay and it’s capped once you hit $132,900 in earnings. This means the maximum amount of Social Security tax you will pay in one year is $8,239.80.
Medicare has no cap and is calculated at 1.45% of an employee’s gross pay. If an employee earns more than $200,000 in a single year, you may decide to withhold an additional 0.9percent for wages on Medicare for anything greater than $200,000. This 0.9% payment is made by the employee and not the employer.
It is not that easy to calculate Federal and State Income taxes, but you can find a tax preparer to guide you on that. Federal income tax is determined by the Form W-4 that an employee submits, indicating their filing Status as well as their number of exemptions. You will then need to reference Inland Revenue Service Publication 15B, Section 17: How to Use the Income Tax Withholding Table to see how much tax to withhold from your employee. Please note, this tax table gets updated annually by the IRS.
For state income tax withholding, there is a similar table produced annually by each state that determines how much state income tax to withhold from each employee’s paycheck. For example, if your employees work in California, you can follow the directions on the 2018 Withholding Schedule to determine how much state income tax to withhold from your employee’s paycheck.
You can contact your Tax Preparer or Accountant for further guidance on any issues relating to Payroll Taxes
Flynn Financial Group Inc