Unraveling Payroll Tax Accountability: Who Pays and Why

Everytime you lower a test for an worker, the worker isn’t the one one receiving cash. You need to withhold payroll taxes from worker wages and remit them to the correct businesses. Relying on the payroll tax, you should match worker contributions. However, not all payroll taxes are created equally. So, who pays payroll taxes? Is it the employer, the worker, or each? Learn on for the inside track.

Who pays payroll taxes?

So, who pays payroll taxes? The brief reply is employers and workers pay payroll taxes on wages, suggestions, and revenue. The lengthy reply is a little more sophisticated. It seems employers and workers share some payroll taxes and never others. 

Shared payroll taxes

Employers and workers pay equal parts of FICA taxes. FICA taxes are obligatory payroll taxes employers and workers pay paid by employers and workers within the U.S. and embrace Social Safety and Medicare taxes. Social Safety and Medicare are “insurance coverage” taxes that assist sure teams within the U.S. 

As an example, Social Safety supplies partial revenue alternative for:

• Retired adults
• People with disabilities
• Certified spouses, kids, and survivors (e.g., widows or widowers)

And, Medicare is a medical health insurance program for individuals:

• 65 years or older
• With qualifying disabilities below 65 years outdated
• With end-stage renal illness

Consider FICA tax as a future security web you and your workers assist create. Now that you already know what FICA taxes pay for, let’s take a look at who pays them. 

Social Safety

Each employers and workers pay Social Safety tax. Employers withhold Social Safety taxes from worker wages and match the worker’s contribution.

Social Safety tax is a flat price of 12.4% break up between the employer and the worker. In different phrases, you pay 6.2% and withhold the remaining 6.2% from worker wages. 

Due to the Social Safety wage base, not all worker wages are topic to tax. You need to cease withholding taxes from an worker’s wages as soon as they attain the wage base for the calendar 12 months. For 2024, the Social Safety wage base is $168,600. As quickly as an worker’s wages attain $168,600 for the 12 months, cease withholding (and matching) Social Safety for that worker.

Medicare

Employers and workers additionally share Medicare tax. Like Social Safety, you should withhold Medicare from worker wages and match the worker’s contribution.

The Medicare tax price is 2.9% break up between worker and employer. The employer should withhold 1.45% from worker wages and contribute an identical 1.45%. 

Whereas there isn’t a wage base for Medicare taxes, there’s an extra Medicare tax of 0.9% it is best to find out about. The extra Medicare tax isn’t a shared tax; solely the worker pays it. 

Employers should withhold the extra tax from workers’ wages as soon as they attain the $200,000 threshold.

Employer payroll taxes

Employers and workers don’t share all payroll taxes. There are some payroll taxes paid solely by employers. 

Employers should pay the next payroll taxes:

• Self-employment taxes
• Federal unemployment tax
• State unemployment tax

Self-employment taxes

Employers pay self-employment tax when they’re … (drum roll, please) self-employed. As a result of nobody withholds FICA taxes from their wages, self-employed staff want a strategy to remit their Social Safety and Medicare taxes. That is the place self-employment taxes come into play.

The self-employment tax price is similar because the FICA price—15.3% of annual earnings. 

Right here’s how the self-employment tax breaks down. The self-employment tax price is 15.3%. Social Safety taxes make up 12.4%, and Medicare covers the remaining 2.9%. 

Self-employed staff should preserve monitor of the Social Safety wage base and the extra Medicare tax. Each are the identical for self-employed staff as they’re for workers.  

Federal unemployment tax

The Federal Unemployment Tax Act (FUTA) is an unemployment tax on employers. The federal authorities relies on FUTA taxes to supply unemployment compensation to staff who’ve misplaced their jobs. 

Some employers don’t must pay FUTA tax. The IRS has three exams that can assist you decide if it’s important to pay FUTA taxes:

• Common take a look at
• Family workers take a look at
• Farmworkers take a look at

Every take a look at is for a particular sort of worker. If the solutions to a specific take a look at apply to your state of affairs, you should pay FUTA tax on worker wages. For extra details about the exams, see IRS Publication 15. 

The FUTA price is 6% and applies to the primary $7,000 paid to an worker for the 12 months. This $7,000 is the FUTA wage base. 

Due to the wage base, the most important FUTA quantity you’ll pay per worker is $420 ($7,000 X 0.06). When you pay greater than $420 per worker, you’ve paid an excessive amount of. 

It’s possible you’ll be eligible for a FUTA tax credit score (most employers are) of as much as 5.4%. But when your small business is situated in a credit score discount state, the quantity of FUTA tax credit score you may obtain decreases.

State unemployment tax

State unemployment tax (SUTA) helps fund unemployment packages and advantages to workers who misplaced their jobs by way of no fault of their very own. Whereas unemployment taxes are normally employer-only taxes, there are a couple of exceptions to the rule. Alaska, New Jersey, and Pennsylvania require you to withhold cash from worker wages as nicely. 

SUTA tax is a proportion of worker wages. State unemployment tax charges differ from state to state. SUTA tax goes by different names. As an example, California has state unemployment insurance coverage (SUI), and Florida has a reemployment tax. Whatever the identify, all states have an unemployment tax.

Ensure that to pay the SUTA tax to the state the place the work takes place. In case you have workers working in several states, you’ll pay SUTA tax to every state the place the work is carried out.

To discover a state’s SUTA price, merely join a SUTA tax account with the suitable state and the state will ship all the knowledge you want. 

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Worker payroll taxes

There are some payroll taxes that solely the worker has to fret about, like federal, state, and native revenue taxes. Once more, workers who stay in Alaska, Pennsylvania, or New Jersey should pay state unemployment insurance coverage (SUI). 

Federal revenue tax

Federal revenue tax is an employee-only tax you should withhold from worker wages. There isn’t a single price for federal revenue tax. Withholding for federal revenue tax relies on the worker’s:

• Pay frequency
• Submitting standing
• Annual revenue
• Type W-4

Once more, federal revenue tax doesn’t have a flat price. If you wish to calculate federal revenue tax by hand, use IRS Publication 15 for withholding tables. However, withholding federal revenue tax from worker wages doesn’t must be sophisticated. On-line payroll software program can calculate payroll taxes so that you don’t must. 

State revenue tax

Most states have a state revenue tax. So, there’s probability that you just’ll must withhold state revenue tax from worker wages. 

Some states use a flat price for his or her revenue tax, whereas others use tax brackets to determine what price workers pay. Go to your state’s Division of Income for extra data. 

The next states would not have a state revenue tax on worker revenue:

Whereas New Hampshire doesn’t have a state revenue tax on wages, they do levy an revenue tax on dividend and curiosity revenue. 

Native revenue tax

Native revenue taxes assist pay for neighborhood enchancment tasks and training. Native revenue taxes happen solely in states which have a state revenue tax. However not all states with state revenue tax could have native revenue taxes. 

Native revenue taxes range between municipalities. There are some frequent tax charges it is best to find out about:

• Flat tax price: A single price throughout all revenue ranges
• Progressive tax price: The tax price will increase with worker revenue
• Flat greenback quantity: All workers pay the identical greenback quantity, no matter their annual revenue

Test native legal guidelines to be sure to’re withholding the correct amount of native revenue tax from worker wages. 

Who pays payroll taxes, worker or employer? Cheatsheet

* Just for workers working in Alaska, Pennsylvania, and New Jersey. 

State-specific payroll taxes

Relying in your state, there could also be further state-specific taxes that you must find out about. Be looking out for issues like:

Contact your state to study who contributes to those payroll taxes and the tax charges. 

With Patriot’s Full Service payroll, your payroll taxes may be simpler than ever. Merely enter your payroll data, and we’ll deal with calculations, deposits, and the mandatory varieties. Strive it at no cost at the moment!

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