Decoding Federal Payroll Tax

As an employer, learn more about the ins and outs of tax witholdings as they relate to your employees.


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Everyone remembers the excitement of getting their first check only to wonder where all the money went. Taxes can take a generous portion of a person’s earnings, and federal payroll tax can be difficult to figure out. The Federal Insurance Contributions Act, or FICA, is a federal law that requires three different taxes to be withheld from wages.

For employers, this means it’s important to understand what your responsibility is in withholding taxes from employees. Currently, FICA taxes include a 6.2 percent tax for Social Security, 1.45 percent tax for Medicare, and 0.9 percent Medicare “surtax” if an employee makes over $200,000.

Federal Payroll Tax

As the employer, it’s your responsibility to pay a percentage of these taxes on behalf of your employees. Everyone has to pay the same percentage of Medicare and Social Security taxes. However, when a person is an employee, they share these taxes with their employer. FICA taxes are in addition to several other taxes you may have to withhold from your employee’s paycheck.

You may also have to withhold state taxes, and those vary based on where you are located. Just like federal taxes, state taxes can change on a regular basis. Some companies choose to open shop in a certain state based largely on state tax rates.

What is the Federal Payroll Tax Rate?

The FICA taxes can and do change. For example, the Medicare surtax was only introduced in 2013. It’s important to keep up to date with the latest tax rates, which are usually automatically generated and every payroll software system calculates withholdings.

There are also wage caps and floors. For instance, the Social Security tax has a dollar limit that changes every year due to inflation. On the other hand, there is no dollar limit for the Medicare tax. In 2017, employer obligations to pay Social Security tax ended when an employee earned $127,200 for the year.

What Percentage of Payroll is Taxes?

The dollar amount of taxes withheld depends on where you do business. Every state has its own taxes and percentages. Plus, withholdings can stop at a certain dollar limit in some instances, like with Social Security taxes. However, assuming a person earns no more than $127,200, total federal taxes are 7.47 percent of payroll.

How Do You Figure Out Payroll Taxes?

The best way to figure out payroll taxes is to hire a third-party payroll department if you don’t have one in-house. Another option is to depend on a trusted, high-quality payroll software system like Quickbooks. However, human error can still occur. Ultimately, it is the job of the employer to make sure they are properly withholding taxes for their employees (find a guide for employer payroll taxes here).

There has been a recent surge in hiring contractors and freelancers. In most of these cases, this is easier for employers because they don’t have to withhold any taxes. Instead, the worker is considered self-employed and is responsible for handling their own taxes. In these cases, they are considered both employer and employee, and pay all of the Social Security and Medicare taxes. For clarity on the difference between independent contractors and employees, we’ve got just the breakdown


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