Everyone in the United States who receives a paycheck, irrespective of what their job may be, is required by federal law to contribute to payroll taxes. Certain amounts of these taxes are the responsibility of the employee, and others are paid by the employer. In this post, we’ll delve into what payroll taxes are, what the rates are for 2018, changes for 2019, how to calculate payroll taxes, where the money goes, and who pays what.
Payroll Tax Defined
Simply put, payroll taxes are an amount of money that is paid to the Internal Revenue Service (IRS) – and to states and local entities that collect income tax – based on the wages of employees. The taxes are deducted from employee paychecks and are used to finance two government-run programs: Social Security and Medicare. These social insurance taxes make up 24.2% of combined federal, state, and local government revenue, and they’re the second largest source of government revenue in the United States. Federal income tax takes first place.
What Falls Under the Payroll Tax Umbrella?
All told, as an employer, you are responsible for the following taxes with regard to employee pay:
- Withholding federal income taxes
- Withholding FICA taxes, as well as submitting the additional half that your business is responsible for
- Withholding state and local income taxes where applicable
- Paying federal and state unemployment taxes
- Paying workers’ compensation taxes to state and federal agencies
Federal Income Tax
This tax is calculated based on the most recent Form W-4 an employee has filled out. The IRS publishes annual tables to help you determine the amount of tax to be withheld from each employee’s paycheck. The percentage is dependent on the employee’s gross wages, filing status, and the number of exemptions listed on the W-4.
State and Local Income Tax
These taxes vary wildly depending on the state. Seven states do not tax individual income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee impose income taxes solely on dividends and interest and not earned wages.
These next two federal payroll taxes are also known as “FICA", which stands for “Federal Insurance Contributions Act.” You’ll see them printed as “FICA – Medicare” and “FICA – Social Security” (or some variation thereof) on employee pay stubs.
1. Medicare is a 2.9% pay roll tax that is split equally between employer and employee. Employees and employers will each pay 1.45% Medicare tax on the first $200,000 of the employee’s wages.
The Affordable Care Act (ACA) added a provision wherein highly compensated employee must pay an additional 0.9% Medicare tax.
The threshold annual compensation amounts that trigger the additional tax are:
- $250,000 for married taxpayers who file jointly
- $125,000 for married taxpayers who file separately
- $200,000 for single and all other taxpayers
2. Social Security is a 12.4% payroll tax. For 2019, the Social Security tax will be paid on the first $132,900 of wages, a $4,500 increase from last year. Half of these payroll taxes (7.65%) are directly remitted to the IRS by employers, while the other half is taken out of workers’ paychecks.
Federal Unemployment Tax
This 6% tax is solely paid by the employer. Employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. This credit is lower in “Credit Reduction States” where the state has not repaid money it borrowed from the federal government to pay unemployment benefits.
State Unemployment Tax
Each state administers its own unemployment insurance program within guidelines established by federal law. Three states – Arkansas, New Jersey and Pennsylvania – require minimal employee contributions in certain situations.
Where the Money Goes
|Employer||Employee||Total||Income Cap||What They Pay For|
|Social Security||6.2%||6.2%||12.4%||$132,900||85 cents of every dollar goes into an account that pays benefits to retirees and surviving spouses and children of employees who have died. The other 15 cents is put into an account that pays benefits to people with disabilities.|
|Medicare||1.45%||1.45%||2.9%||No Limit*||Goes into an account that pays for some healthcare costs for Medicare recipients.|
|State Unemployment||Variable||None||Variable||Variable||Paid to participating state workforce agencies to pay unemployment benefits. State laws determine these tax rates.|
|Federal Unemployment||6.0%||None||6.0%||$7,000||Covers the cost of managing the Unemployment Insurance and Job Service programs in every state.|
*Wages of more than $200,000 earned in 2018 will be taxed an additional 0.9%
How to Calculate Employer Payroll Taxes
FICA and Unemployment taxes are relatively standard and, therefore, easier to calculate. Federal and state income taxes, however, can be a bit more of a challenge.
Form W-4 determines the amount of Federal income tax that is withheld from a paycheck. This form shows employees’ filing statuses and number of exemptions they claim. IRS Publication 15B, Employer's Tax Guide, in Section 17: How to Use the Income Tax Withholding Table, indicates how much tax to withhold from each employee. This tax table is updated annually by the IRS, so it’s important to keep on top of things.
A similar tax table is produced annually by each state. As an example: if your employees work in Georgia, you can download the 2017 Georgia Income Tax Tables to determine precisely how much state income tax to withhold from your employees’ paychecks.
Payroll Tax Penalties
There’s no way around it: Your company is required by law to submit payroll taxes to the government. If taxes are paid late, incorrectly paid, or just not paid at all, your business can be faced with harsh penalties and accrue thousands of dollars in interest on unpaid taxes.
The percentage rate charged for a penalty depends on how late your payroll tax deposit is received. For late amounts or deposits that aren’t properly prepared, the penalty rates are:
- 2% for deposits 1–5 days late
- 5% for deposits 6–15 days late
- 10% for deposits greater than 15 days late.
- 10% for deposits required to be paid by Electronic Funds Transfer (EFT) that are not.
- 15% (a 5% addition to the 10% for late payment) for all amounts that remain unpaid more than 10 days after the date of the first notice, or the day on which the taxpayer received a demand for immediate payment, whichever is earlier.
Overseeing the payment of payroll taxes can be extremely overwhelming. If you’re a small business owner with only a handful of employees, the process can be manageable. But, it can also be fraught with uncertainty. A single mistake in calculations could end up costing you thousands. If you work for a larger company with many employees, managing payroll on your own with spreadsheets or disparate systems, is simply untenable.
The good news is, by hiring a payroll provider, you won’t have to worry about submission guidelines, accuracy of payment, or getting your payroll taxes paid on time. We will take care of it for you, saving you the hassle and anxiety every time payroll rolls around.
Looking for a hassle-free way to manage payroll and tax compliance? Paycor got its’ start in the Midwest, learning to manage the complexities of the nation’s most challenging regulatory environment. For 25+ years, we’ve lead in the way in keeping SMB clients compliant, and it all starts with our Payroll product. Click here to learn more about our payroll and tax expertise, or contact one of our expert solutions consultants so we can learn more about your business.
NOTE: This information is meant to be a general article about how payroll taxes largely work. This article is not intended to serve as tax or legal guidance for your business. For advice specific to your company, consult a tax professional.
Take Compliance Quiz
How effectively is your organization managing compliance risk? Find out and get a customized plan.Take Quiz
Stay Up to Date
Sign up to receive our latest research and expert advice.
Check your inbox for an email confirming your subscription. Enjoy!