There’s a lot you should be aware of when it comes to payroll taxes. The IRS provides guidance online but here are some frequently asked questions.
- What do payroll taxes pay for?
The federal government levies payroll taxes on wages and uses most of the revenue to fund Social Security, Medicare, and other social insurance benefits. Federal income taxes also go towards things like defense and security.
State income taxes go towards a variety of areas, the most important being education and health care, as well as transportation, corrections, state police, parks, and recreation.
- How can I pay payroll taxes online?
After collecting federal withholding tax from employees, an employer can pay them online using the Electronic Federal Tax Payment System (EFTPS). State agencies will generally have their own electronic or manual processes to submit state payroll taxes.
Aside from just paying taxes, employers must also submit federal tax filings to the IRS, state payroll tax filings to the related state agency, and Form W-2s to the Social Security Administration.
- Generally speaking, what are the payroll taxes and percentages?
There are typically four types of taxes that you’ll notice on your pay stub: federal income tax, Social Security tax, Medicare tax, and a state income tax (note that not all states have an income tax, some states may levy additional taxes, and some employees might be excluded from certain taxes).
Both the IRS and state tax agencies publish annual tables to determine the amount of tax to be withheld from each paycheck depending on the employee’s gross wages, filing status, number of withholding allowances (exemptions) and pay frequency. Social Security and Medicare taxes put together are called “FICA” (Federal Insurance Contributions Act) taxes and have specific rates and thresholds.
For 2019, the Social Security tax rate is 6.2% on the first $132,900 of wages paid, up $4,500 from 2018. The Medicare tax rate is 1.45% on the first $200,000 of wages (plus an additional 0.9% for wages above $200,000).
- Which states do not have an income tax?
There are currently nine states in the U.S. that do not levy an income tax on wages:
- South Dakota
- New Hampshire and Tennessee don’t tax wages, but they do tax some dividends and interest income
- Types of Payroll Taxes
Employee payroll taxes are usually made of these four taxes:
- Federal Income Tax
- State Income Tax
- Social Security
Employer payroll taxes are usually made up of these four taxes:
- Federal Unemployment Tax
- State Unemployment Tax
- Social Security
Please note, this is only intended as an overview of how payroll taxes generally work. It is not tax or legal advice. For guidance or advice specific to your business, you should consult with a tax or legal professional.