Taxes are an integral aspect of any business. And even if you’re an employee, you have to pay certain taxes to the government. Several people are unfamiliar with the most common taxes we have to pay. One of those taxes is the payroll tax.
For both employers and employees, payroll taxes become applicable from the day of hire. This is not a single tax but rather a term that includes all taxes coming under an employee’s wage.
Let’s first learn what payroll taxes are. We will then take a glimpse into the calculation process for the employer and the employee.
As an employer, you are responsible for paying a certain amount of tax out of your company’s revenue, as well as deducting a portion of the employee’s salary to pay this tax on their behalf. This together constitutes the payroll tax.
Basically, the payroll tax is a percentage of money withheld from the salary of an employee to be paid to the government. The amount of tax depends on the wages and tips earned by the employee.
The tax is deducted directly from the employee’s gross salary and paid to the Internal Revenue Service (IRS). Federal payroll taxes fund Medicare and Social Security programs, labeled as MedFICA and FICA. On the other hand, the income tax goes into the US Treasury.
The federal payroll tax rate is 6 percent on the first $7,000 in covered wages. This can be reduced to 0.6 percent through tax credits. The present tax rate for social security on the part of both the employer and employee is 6.2 percent each. Combined with the 1.45 percent Medicare rate, the total FICA tax rate comes to 15.3 percent of the employee’s total wages.
The US payroll tax is termed as a “regressive tax” - as opposed to the “progressive” income tax. This is because it takes more from low-income people as compared to high-income individuals.
The employee and employer payroll taxes have a few components. They are:
Now that you’ve understood what constitutes payroll tax, let’s check how to calculate it.
To calculate an employee’s payroll tax, you need to first figure out their gross salary and the amount of tax to be withheld. Also, check if any additional deductions have to be made, like retirement benefits, health insurance, and so on.
You can follow these simple steps to calculate payroll taxes. If that’s not clear enough, you can also use a payroll tax calculator, many of which are available online.
Payroll tax is a very crucial element of tax deductions. It includes several aspects and calculations. If filed incorrectly, it can also warrant penalties.
Make sure you calculate payroll taxes carefully and pay on time to avoid late charges. If you’re not confident of your mathematical skills, you can also outsource payroll to tax experts or companies for a relaxing tax season.
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