You have a new job, and they're offering $1,000 a week to start! That's good news, but even more important than how much money you're making each week, is how much money is making it into your pocket. Payroll taxes can take quite a large bite out of a weekly paycheck.
Paying Payroll Taxes
As the saying goes, taxes are one of those guarantees in life. You're protected by police, schooled, and paying politicians to make decisions on your behalf. Whether this applies to a local municipality or the federal government, this is big business. The government is the largest employer in the United States, and government employees deserved to be paid, and most of that money will come from your paycheck.
Besides employing a large number of people to administer and provide citizens with essential services, the government also supplies important medical and retirement benefits. With that as a background, let's take a closer look at the types of payroll taxes employees pay.
Withholding Taxes
The withholding of payroll taxes is normally the responsibility of an employer, including those that are self-employed. In the United States, employers are responsible for withholding federal income taxes, Social Security, and Medicare taxes. In many states, an employer may also be responsible for withholding a state or even municipal income tax.
Federal Income Taxes
As the name implies, federal income taxes are used to support the activities of the federal government. Some of the larger expenditures include the military, energy exploration, education, science, and human services.
Generally, the amount of tax paid increases as gross income increases. That is a general rule, because income taxes are based on adjusted gross income, which accounts for all sources of income as well as tax deductions. After all adjustments to income are made, tax tables, or tax brackets, are used to calculate the actual federal income tax liability.
FICA: Federal Insurance Contributions Act
Under the Federal Insurance Contributions Act, or FICA, approximately 15.3% of an employee's earned income is paid into the two components of FICA: Social Security and Medicare. If you're a salaried employee, then your employer is responsible for paying half of all the FICA taxes due. For many individuals, that means paying around 7.65% of gross income into these two programs. Individuals with incomes in excess of $200,000 will pay an even higher percentage.
Social Security
While Social Security is typically thought of as a source of retirement income, it also provides income to the disabled, health care insurance for the aged, and unemployment compensation. There is a limit to the Social Security tax an individual is required to pay each year. For example, in 2020 the limit is $8,537.40, and that is based on a 6.2% tax on the $137,700 income limit. In 2021, the limit increases to $8,853.60 which is based on a 6.2% tax on the $142,800 limit.
Medicare
Medicare is a health insurance program for individuals age 65 and older, or persons with certain disabilities. Unlike Social Security, there is no income limit on Medicare payroll taxes. For many individuals, that means paying 1.45% of gross income into the Medicare fund to pay for these important services.
Wages paid in excess of $200,000 for single filers and in excess of $250,000 for married filers in 2013 through 2021 will be subject to an extra 0.9% tax.
State Income Taxes
Individuals living in the states of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, don't need to worry about state-level income taxes because they have none. For the rest of Americans, there is a complex set of tax brackets and income tax rates that apply to each state.
As is the case with federal income taxes, state income taxes are paid after taking credit for deductions or exclusions. For a brief overview of this topic, take a look at our publication: State Income Taxes.
Municipal Taxes
In general, most of the larger cities across the United States charge a municipal income tax or city tax. The rates of certain cities can be quite high. For example, New York City charges a payroll tax in the area of 3%. Unlike federal and state taxes, individuals are usually charged municipal income taxes based on where they work and not where they live.
For example, if Ann lives in New Jersey and works in New York City, then she will pay federal income taxes, New Jersey state income taxes, and city taxes are owed to New York City.
Payroll Calculators
Finally, there are a number of payroll tax calculators individuals can use to estimate the amount of payroll tax to be paid. Two of the better calculators on the web include:
IRA Withholding Calculator: right from the ultimate authority on payroll taxes, this calculator can help figure out if the amount of federal income tax withheld is correct.
Paycheckcity.com: this calculator provides estimates for both state and federal income taxes.
Additional Resources
- Unlike the federal government, which has a series of tax brackets that apply to all U.S. taxpayers, state-level income tax rates are not standardized. In fact, several states do not even have an income tax but rely on other sources of funds to provide essential services to their residents.
Moneyzine EditorDecember 5th, 2023 - In this article, we're going to discuss the topic of tax-friendly states. That point of view will be from both a residential standpoint as well as a business perspective. Taxes provide state-level governments with a source of income so they can provide the essential services that everyone enjoys. But there is no doubt that some states are more tax-friendly than others.Moneyzine EditorOctober 4th, 2023
According to the U.S. Treasury Inspector General for Tax Administration, over 2 million taxpayers fail to take a state sales tax deduction on their federal income taxes. This works out to nearly $4 billion in missed deductions each year.Moneyzine EditorDecember 5th, 2023- As the close of the year draws near, taxpayers grow concerned about limiting their tax liability in 2021. By understanding their incremental federal income tax rates, individuals can appreciate the benefit received from a potential deduction.Moneyzine EditorDecember 5th, 2023
- Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act, or FICA. This tax has its origins back in 1935, when it was introduced as part of the Social Security program.Moneyzine EditorDecember 5th, 2023
- Federal income taxes and the issuing of debt are the two largest sources of U.S. government funding. But with a national debt of $23 trillion, the government is looking for additional sources of money to fund their spending. One of those potential sources is a national value added tax, or VAT.Moneyzine EditorOctober 4th, 2023
