Wage taxes are wage amounts withheld from an employee’s salary during the payroll process, and employers generally have to match these amounts. Payroll agents accounted for a significant portion of the U.S. federal budget, particularly for Social Security programs.
Some payroll taxes are also known as “ FICA taxes. FICA stands for “Federal Insurance Contribution Act” and includes social security and Medicare taxes. Unemployment insurance is also a payroll tax, but is not considered a FICA tax.
Social security taxes
Social security taxes apply to taxes prescribed by FICA that pay old-age, survivors’ and disability insurance (OASDI). The tax contributed 88% to OASDI in 2019. These programs are also funded by income taxes on social security benefits paid. Social security ceiling. You do not have to pay a portion of your salary or wages that exceeds a certain threshold.
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The social security tax was levied by only 1% in 1937, when it was first introduced, but has increased significantly since then.
Medicare taxes
Medicare taxes fund the country’s health insurance (HI) program. This tax pays for hospital stays, some home health care, and hospice care for eligible individuals. Since its inception, the tax has covered Medicare Advantage plans and prescription drugs. This program contributed 36% in 2019.
There is no pay or earnings cap on the Medicare tax. In fact, high-income earners are hit with an extra tax called an additional Medicare tax.
Wage earners generate significant revenue. According to the Center for Budgetary and Political Priorities, $ 1.24 trillion was generated in 2019. This accounts for 5.9% of the country’s gross domestic product (GDP) and 35.9% of the country’s total revenue. Social Security alone received $ 914 billion in payroll taxes, making it the second largest source of income for the federal government behind income taxes.
How payrolls work
Payroll taxes are levied as a percentage of your income. The employer usually pays half of this percentage and the other half through withholding. Employers are required by law to contribute to these taxes and report amounts withheld from employees ’salaries on Form W-2. The employer sends the consent information to the IRS after the end of the year.
Employers must keep this money in a separate account and pay these amounts to the federal government on a monthly or semi-weekly schedule. Unemployment taxes are payable quarterly if you owe more than $ 500. Employers are responsible for paying all unemployment taxes.
Self-employed people have to pay all payroll taxes because they are considered both employers and employees under current tax laws. Together, their Social Security and Medicare data is the self-employment tax required by the Self-Employment Contributions Act (SECA).
Types of payroll accounting
There are four payroll taxes: Social Security, Medicare, Supplemental Medicare Tax, and Federal Unemployment Tax.
Social Security tax
This payroll tax is levied at 12.4% (evenly distributed between the employer and the employee). Of this 12.4%, 10.6% is covered by the OASI Pension and Survivors’ Fund and the remaining 1.8% is covered by invalidity insurance.
Social security tax will only be payable on annual earnings, up to $ 142,800 by 2021. Income in excess of $ 142,800 is not subject to Social Security tax, but only for the remainder of the year. His income will return to zero in January. 1 next year.
The wage bill is indexed relative to inflation and is expected to increase in 2022. It was $ 137,700 in 2020, compared to $ 132,900 in 2019.
Medicare tax
Sometimes referred to as “HI” or “MEDFICA,” this payroll contributes Part A Medicare benefits to older taxpayers and those with certain illnesses or disabilities. Other parts of Medicare are not included. The tax is 2.9%: The employee and the employer pay 1.45%. This tax was limited to a certain amount of annual earnings, but the cap was removed from the federal code in 1994.
Social security and Medicare tax rates are the same for self-employed people. The only difference is that they have to pay the full percentage, not just half.
Additional Medicare tax
The Additional Medicare tax will be 0.9% from 2021, and employers will be required to withhold this from employees ’pay as well, but will not have to comply with it.
It is payable only on income of more than $ 200,000 for single taxpayers or more than $ 250,000 for married people. The income threshold only drops to $ 125,000 if you are married separately.
Those who exceed the threshold pay a regular Medicare tax and an additional Medicare tax.
Unemployment tax
States pay unemployment compensation to lost workers. States are working with the federal government to provide this program. Unemployment taxes collected from employers are placed in a federal fund. Employees are not required to contribute to this payroll.
The unemployment tax rate is 6% of the income paid, up to a maximum of $ 7,000, but the federal government provides tax breaks that can reduce this to just 0.6%. Unemployment tax must also be paid at the state level.
Disadvantages of payroll accounting
All of these taxes amount to a good bit of money, which has led to quite a bit of controversy over the years.
It was argued that employers would actually transfer 7.65% less of their social security and Medicare taxes by paying their employees than they would otherwise compensate, half of this 15.3%, if they had to pay out half of them. pay taxes. Their payroll liability results in lower wages for employees and employees will still have to pay out their 7.65% stake.
Lower-income workers also pay this social security tax on all of their income, while high-income earners do not have to reach the wage fund threshold, at least for the rest of the year.
But high-income earners are somewhat disadvantaged by the additional Medicare tax. They pay more into Medicare, but the services they are entitled to are the same as those that pay less taxpayers. Again, high-income earners are not taxed on social security after income above the threshold, but are eligible to collect Social Security when the time comes.
Key Takeaways
- Wage taxes are made up of four separate taxes: Social Security, Medicare, Supplementary Medicare, and Unemployment Insurance. However, not all employees pay for all of this.
- Employers and employees share Social Security and Medicare taxes, each paying half, but self-employed people have to pay both.
- The additional Medicare tax is reserved for high-income earners. Employers do not have to share this tax.
- Employees are not required to contribute to unemployment insurance tax.
