What is payroll tax?

What is payroll tax? After the payroll tax suspension, the payroll tax is a hot topic but what the payroll tax includes? The payroll tax is the tax taken out from an employee’s income when processing payroll. This includes income taxes, Social Security tax, and Medicare tax.

The payroll tax suspension doesn’t include all the above though. Only the Social Security tax collected from the payroll will be suspended. This means the employee and the employer will get to keep 6.2%. With that said, your next paycheck after September 1st will be 6.2% more which would mean about $100 to $200 for most Americans.

Not everybody is eligible for the payroll tax suspension though. If your earnings are more than $104,000 annually, Social Security tax suspension doesn’t apply to you and the rest of the payroll taxes will continue to be collected.

In no particular order, the 5 payroll taxes are as follows.

5 Different Payroll Taxes

Federal Income Tax

The Internal Revenue Service requires employers to withhold federal income taxes from their employees’ paychecks. The amount of tax withheld is used for paying the employees’ federal income taxes.

As for how the tax withholding is determined, the employee fills out a Form W4 and the employer uses the tax withholding tables to determine the needed tax withholding. The total amount of federal income tax withheld can be found in Box 2 of Form W2.

Learn more about 2024 Form W4.

Learn more about tax withholding tables.

State Income Tax

Unless you live in one of the states that don’t require you to pay income tax, your employer will withhold state income taxes. It works the same way as federal income taxes withheld from the employee’s income. The total amount of state income tax withheld can be found in Box 17 of Form W2.

Local Income Tax

If the local government taxes your earnings, your employer will withhold local income tax. This is usually a relatively small tax compared to federal and state income taxes.

Social Security Tax

Employees and employers pay 6.2% each for the Social Security tax. It is totaled at 12.4%. Employers match the Social Security tax the employees are paying. Considering Social Security is the biggest expense of the federal government at $1.151 trillion the 12.4% is definitely necessary.

Medicare Tax

After Social Security, Medicare is the second-largest expense of the federal government. Medicare budget last year was $722 billion. It is funded with the payroll taxes employees and employers pay. Only 1.45% of the employee’s salary is subject to Medicare taxes. However, if the employee is earning more than $200,000, there is an additional 0.9% Medicare tax, totaling it to 2.35%.

Reporting Payroll Taxes

The payroll taxes withheld from employees’ paychecks are reported using Form 941 every quarter. This is known as the Employer’s Quarterly Federal Tax Return. Employers not only will report these taxes withheld but also use it to pay the employer portion of Social Security and Medicare tax.

Form 941 along with other tax forms can be found here.

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