Payroll taxes are federal, state and local taxes withheld from an employee’s paycheck by the employer. These taxes consist of income taxes as well as Social Security and Medicare taxes, the latter two often referred to as “the payroll tax.”
Social Security and Medicare taxes are matched by the employer. Two payroll taxes, FUTA (Federal Unemployment Tax Act) and SUI (state unemployment insurance) are paid solely by the employer and based upon employees’ wages and other factors.
There are three states where both the employer and the employee contribute to the unemployment tax: New Jersey, Pennsylvania and Alaska.
Every employee is required to fill out and sign a W-4 form. Federal and state income taxes (and local income taxes where applicable) are calculated based on the employee’s W-4 form. On this form, the employee declares the amount of withholding.
The IRS, in turn, provides the income tax calculation based on those declarations. The employee can include more in withholdings than is required by the IRS. State taxes are determined in much the same way. Every individual state’s tax board provides a calculating formula for tax withheld.
To calculate the payroll tax, the employer must know the current tax rates. The Social Security tax rate for employees in 2016 is 6.2%, and the Medicare tax rate is 1.45%. The employer must contribute 6.2% for Social Security and 1.45% for Medicare.
After reaching $118,500 in wages, Social Security deductions cease for both employee and employer. This wage base amount is determined on a year-by-year basis. Medicare contributions continue regardless of wages.
As mentioned before, paying a few taxes is solely the employer’s responsibility. The FUTA rate is 6.0%, but a credit of up to 5.4% for SUI taxes can be taken. If eligible for a maximum credit, the FUTA rate will be 0.6%. The wage base for FUTA is $7,000. Payments to FUTA cease for each employee whose wages exceed $7,000 for the year. The SUI tax rate is based on unemployment claim activity by employees who have been terminated.
For help calculating anything on your own we encourage you to use our business calculators for help. They shouldn’t be used to run payroll or your business but can help guide you when making decisions.