What is payroll tax?
What is payroll tax? Payroll tax refers to the taxes that are withheld from an employee’s income when processing payroll. Every paycheck you get, your employer will withhold certain taxes. These are as follows.
- Social Security Tax
- Medicare Tax
- Federal, State, and Local Income Tax
All the above are mandatory with the exception of state and local income taxes. If you live in a state where your wages are taxed, your employer is most likely to withhold tax for that. On the other hand, federal income tax, Social Security tax, and Medicare tax is mandatory. All employees must pay these taxes by withholding from their income.
The payroll taxes raise a big question lately due to the payroll tax suspension. President Trump signed the executive order for the suspension of payroll taxes. It doesn’t apply to all payroll taxes though. Only Social Security tax will be suspended and the rest of the payroll taxes will be continued to collected.
Social Security tax has a rate of 6.2 percent for both the employee and the employer. This won’t be collected anymore from taxpayers with income less than $104,000. If your income is more than this limit, the Social Security tax will be collected from your income. Learn more about the payroll tax suspension.
As to how much payroll tax is collected from your income, it depends on your salary. Each payroll tax has a specific rate but income taxes are withheld from your income based on the information you provide to your employer. For example, you fill out a Form W-4 to let your employer know about your anticipated tax return. Based on the provided information, the employer uses the tax withholding tables to determine tax withholding.
Both Social Security and Medicare taxes are also known as FICA taxes. With a combined rate of 7.65 percent, it is mandatory for everyone to pay. Individually, Social Security makes up 6.2 percent and Medicare tax 1.45 percent.
