At first glance, payroll taxes may seem extremely complicated. But they’re actually quite simple. Basically, they are taxes that are taken out of an employee’s paycheck to meet government regulations. The amount that the employee makes before payroll taxes is known as their gross pay, and the amount that they receive after taxes is called their net pay. The employer must report these tax withholdings to the applicable government agencies, pay their portion of the payroll taxes, and deposit the withheld taxes with their corresponding agency.
The taxes that come out of an employee’s check fall into a few different categories: Federal income tax, Social Security tax, and Medicare tax withholdings. In some instances, state and local income taxes are also withheld. Additionally, state disability, unemployment insurance, or taxes that support local school districts and community colleges may also be taken out of an employee’s paycheck. Federal, state, and local income taxes are subtracted from the employee’s gross pay using the number of deductions claimed on their W-4.
Social Security and Medicare taxes are also deducted from an employee’s gross pay. These taxes are part of the Federal Insurance Contributions Act (FICA), and they are paid by both the employee and their employer. The taxes taken for these items come to 15.35% of the employee’s gross income, but half of this percentage is paid by the employer.
Social Security taxes are paid at a rate of 6.2% up to a gross income of $118,500, after which no additional taxes are taken. This maximum is adjusted every year based on the Consumer Price Index, which measures changes in the prices of consumer goods. Both the employer and the employee also pay 1.45% of the employee’s gross income with no maximum for Medicare tax withholding. If someone is self-employed, they must pay the full 15.3% in FICA taxes themselves.
Fisher & Hodges CPA’s AC is the premier licensed accounting firm in Princeton, WV. They have expertise in both personal and business taxes. If you need help understanding and handling your payroll taxes, they are here for you. Call them today at (304) 425-2470 to schedule a time to meet with an accountant, or visit their website to learn more about their services.