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Payroll taxes

Government Involvement

Government agencies at various levels require employers to withhold income taxes from employees' wages.

In the United States, "payroll taxes" are separate from income taxes, although they are levied on employers in proportion to salary; the programs they fund include Social Security, and Medicare.[2] U.S. income and payroll taxes collected through deductions are considered to be trust fund taxes, because the employer holds the deducted money in trust for later remittance.[3]

Payroll taxes in United States

Before considering the payroll taxes, it is necessary to talk about the basic formula for the Net Pay. From gross pay (the salary paid to the employee) one or more deductions are subtracted, to arrive at Net Pay. Thus the employee's gross pay (pay rate times number of hours worked, including any overtime) minus payroll tax deductions, minus voluntary payroll deductions, is equal to Net Pay. Payroll tax deductions play a critical role and because they are provided by law they are known as Statutory payroll tax deductions.

The employer must withhold payroll taxes from an employee's check and hand them over to several tax agencies by law. Payroll taxes include the following:
1.Federal income tax withholding, based on withholding tables in "Publication 15, Employer's Tax Guide"[4] by the Internal Revenue Service – IRS;
2.Social Security tax withholding.[5] The employee pays 6.2 percent of the salary or wage, up to $118,500 (as of 2015–2016).
3.). The employer also pays 6.2 percent in Social Security taxes. If you are self-employed, you pay the combined employee and employer amount of 12.4 percent in Social Security taxes on your net earnings;
4.Medicare tax.[5] The employee pays 1.45 percent in Medicare taxes on the entire salary or wage. 0.9% is added for the salary portion bigger than $200,000 (only for the employee portion). The employer also pays 1.45 percent in Medicare taxes (regardless if the amount is bigger than $200,000). If you are self-employed, you pay the combined employee and employer amount of 2.9 percent (3.8% for the portion bigger than $200,000) in Medicare taxes on your net earnings;
5.State income tax withholding;
6.various local tax withholding, such as city taxes, county taxes, school taxes, state disability, and unemployment insurance.

References include the following publications:
Publication 15, (Circular E), Employer's Tax Guide. This publication explains employer's tax responsibilities. It explains the requirements for withholding, depositing, reporting, paying, and correcting employment taxes. It explains the forms any employer must give to its employees, those employees must give to the employer, and those employers must send to the IRS and SSA (Social Security Administration). This guide also has tax tables needed to figure the taxes to withhold from each employee;
Publication 15 – A, Employer's Supplemental Tax Guide. This publication supplements Publication 15 (Circular E), Employer's Tax Guide. It contains specialized and detailed employment tax information supplementing the basic information provided in Publication 15 (Circular E);
Publication 15-B. Employer's Tax Guide to Fringe Benefits. This publication supplements Publication 15 (Circular E), Employer's Tax Guide, and Publication 15 – A, Employer's Supplemental Tax Guide. This publication contains information about the employment tax treatment of various types of noncash compensation.

In the earlier part we have considered payroll taxes related to employee's side. Now it's the moment to talk about the Employer Payroll Taxes Employers are responsible for paying their portion of payroll taxes. These payroll taxes are an expense over and above the expense of an employee's gross pay. The employer-portion of payroll taxes include the following:
1.Social Security taxes (6.2% up to the annual maximum);
2.Medicare taxes (1.45% of wages);
3.Federal unemployment taxes (FUTA);
4.State unemployment taxes (SUTA).
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