Payroll Tax Types

Payroll Tax Types

Every employer in the United States is required to pay what are known as payroll taxes. Payroll taxes are relatively simple to compute, however, keeping track of the different taxes for multiple employees can be quite a challenge. There are three payroll tax types which need to be collected an paid by all employers – Medicare tax, Social Security tax, and unemployment tax. To ensure the proper computation, withholding, and payment of payroll taxes, many companies often employ dedicated payroll departments. A payroll department generally consists of teams of company employees who perform all payroll functions in house – everything from signing paychecks to collecting and filing payroll taxes. These departments can be very costly, however. Alternatively, a smaller business may choose to outsource its payroll work to a trusted CPA firm. In this article, we will explore the requirements of each of the three payroll taxes, Medicare tax, Social Security tax, and unemployment tax.

Social Security Tax

The social security tax is the first component of what are known as the FICA taxes. Half of the social security tax is paid by the employee – it is withheld from the employee’s paycheck. The other half of the tax is paid by the employer. Together, the tax paid by the employer and employee amount to around 12% of gross wages. Wages above roughly $106,000 are not subject to the social security tax.

Medicare Tax

The second component of the FICA taxes is the Medicare Tax. Like the Social Security Tax, Medicare taxes are split between the employer and employee. Roughly 1.5 percent is withheld from the employees pay, while the employer matches the employee’s contribution.  In contrast to the Social Security tax, Medicare taxes do not have a cap. All wages, no matter the amount, are subject to the Medicare tax.

Unemployment Tax

Finally, each employer is required to pay unemployment taxes. These taxes include the Federal Unemployment tax (FUTA), as well as a State Unemployment Tax (SUTA). The federal unemployment tax rate is around six percent of gross employee earnings. State unemployment tax rates, on the other hand, vary from state to state. Employers are allowed to claim a certain percentage of the state unemployment taxes paid as a deduction from the federal income taxes due.

In this article, we have review the Payroll Tax Types and how it is paid.