Many people use the term "payroll taxes" to refer to all withholding, but that is incorrect. Withholding comprises all federal, state and any applicable local taxes, as well as the employee portions of FICA (Federal Insurance Contributions Act) and Medicare taxes that your employer is required to withhold from your paycheck. However, these taxes are not paid by your employer. They are paid by you as an employee.
Payroll taxes, on the other hand, are paid by your employer and include, among others, contributions your employer makes to the federal government that match your Social Security (FICA) and Medicare payments.
Federal Income Tax Overview
Federal income taxes are paid on all “earned income” and, although withheld by your employer and remitted on your behalf, are not paid by your employer. The taxes are deducted from your wages and earnings. You also are liable for taxes on other income, such as (some) Social Security benefits and unemployment payments, but these taxes are not “withheld” in the manner that taxes are deducted from your paycheck.
Read more: How to Calculate Federal Income Tax Rate
You simply must report such income when you file your taxes and pay any amount owed. Your federal tax amount is unfixed, meaning that you pay a larger percentage of your income as you earn more (up to a 37 percent limit for single filers making $518,400 or more in 2020 as explained by Kiplinger).
Social Security Tax Overview
Social security taxes, paid along with Medicare taxes and withheld under the “FICA” banner on your paycheck and W-2 form, are a form of payroll taxes. They constitute a contribution to the “Old-Age and Survivors Insurance Trust Fund,” which was established in 1940 as an amendment to the Social Security Act of 1935.
Read more: What Are FICA Wages?
A fixed percentage of funds received through FICA (and the Self-Employment Contributions Act for self-employed people) is deposited into the Social Security fund every business day. Funds not used for current payments to Social Security recipients are invested in interest-bearing federal securities instruments (by law). The percentage withheld is changed from time to time along with the maximum gross income on which it is calculated.
Your employer matches your contributions, so both you and your employer pay 6.2 percent of pay up to $137,700 for the 2020 tax year, for a total of 12.4 percent in social security tax.
Medicare Tax Overview
Medicare is included in your FICA withholding. As of 2020, Medicare withholding remained at a rate of 1.45 percent of your gross wages up to the same limit as Social Security, which your employer matches. The combined percentage figure for Medicare and Social Security represents a “capped” or fixed tax rate, unlike the uncapped or unlimited nature of the federal income taxes you pay.
As you earn more than $200,000 as single or head of household, $250,000 as married filing jointly or $125,000 as married filing separately in 2020, you must pay an extra 0.9 percent toward Medicare.
Other Payroll Taxes
The federal government, under the Federal Unemployment Tax Act (FUTA), also requires employers to pay unemployment taxes to fund state unemployment benefit coffers. As of 2020, taxes are paid on the first $7,000 of each employee’s wages for a given calendar year. While the FUTA rate is 6.0 percent, the effective rate really is only 0.6 percent if employers adhere to state unemployment contribution laws, thus receiving a 5.4 percent credit allowed by the IRS.
Read more: How to Figure Payroll Tax
State unemployment rates vary and are based on a business’s size, location, nature and number of employees. Many states, and some municipalities, also levy income taxes that are withheld from an employee's pay.
- Kiplinger: What Are the Income Tax Brackets for 2020?
- IRS: Topic No. 759 Form 940 – Employer's Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements
- Internal Revenue Service. "Understanding Employment Taxes." Accessed Nov. 29, 2019.
- Social Security Administration. "Contribution And Benefit Base." Accessed Sept. 29, 2020.
- Internal Revenue Service. "Publication 15 (2019), (Circular E), Employer's Tax Guide." Accessed Nov. 29, 2019.
- Internal Revenue Service. "Topic No. 756 Employment Taxes for Household Employees." Accessed Dec. 5, 2019.
- Social Security Administration. "Contribution And Benefit Base." Accessed Nov. 11, 2019.
- Internal Revenue Service. "Questions and Answers for the Additional Medicare Tax." Accessed Nov. 29, 2019.
- Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Nov. 29, 2019.
- Social Security Administration. "Disability Insurance Trust Fund." Accessed Dec. 5, 2019.
- Social Security Administration. "Old-Age & Survivors Insurance Trust Fund." Accessed Nov. 29, 2019.
- Social Security Administration. "Chronology." Accessed Nov. 29, 2019.
- Social Security Administration. "The Evolution of Social Security's Taxable Maximum." Accessed Nov. 29, 2019.
- U.S. Centers for Medicare & Medicaid Services. "How Is Medicare Funded?" Accessed Nov. 29, 2019.
- U.S. Centers for Medicare & Medicaid Services. "What Part A Covers." Accessed Nov. 29, 2019.
- U.S. Centers for Medicare & Medicaid Services. "What Part B Covers." Accessed Nov. 29, 2019.
- U.S. Centers for Medicare & Medicaid Services. "Drug coverage (Part D)." Accessed Nov. 29, 2019.
- U.S. Centers for Medicare & Medicaid Services. "Medicare Costs at a Glance." Accessed Nov. 29, 2019.
John Kibilko has been writing professionally since 1979. He landed his first professional job with "The Dearborn Press" while still in college. He has since worked as a journalist for several Wayne County newspapers and in corporate communications. He has covered politics, health care, automotive news and police and sports beats. Kibilko earned a Bachelor of Arts in journalism from Wayne State University.