Payroll Tax: Everything You Need to Know

A poll of U.S. workers found that 45% don’t know how much is withheld from each of their paychecks.

Be honest. Do you know how much you’re paying in tax per paycheck, or are you one of the millions in the dark?

If your answer is “no clue,” you have come to the right place. A payroll tax affects both employers and employees alike, so you should become familiar with how much you pay on taxes and what that goes to fund.

Continue reading below for our guide on payroll taxes, and check out a recent pay stub to see how this impacts your pay.

What Is Payroll Tax?

Payroll tax is the tax paid on the salary or wage of each employee per pay period. The taxes go towards funding several government programs, including Medicare and Social Security. These are also referred to as social insurance programs.

You should keep in mind that state and local taxes are a separate, withheld percentage from your pay.

The percentages withheld from each paycheck differ per employee based on overall salary/wages paid, tax brackets, and state and local taxes. Your pay may look very different as an employee depending on geographic location, even in the same role.

Who Pays Payroll Tax?

Though coming from an employee’s paycheck, the payroll tax is organized on the part of an employer. The employer pays the government on behalf of the employee, using the withheld funds from the paycheck.

Employers also pay federal unemployment taxes, though this does not come from the employee’s taxes.

This means the responsibility of payroll taxes lies heavily with employers as they must:

  • Deduct the proper payroll taxes from employees
  • Pay the government these taxes
  • Cover unemployment taxes

What Is the Payroll Tax Rate?

Employees can calculate the exact amount of taxes withheld from a paycheck using the payroll tax rate.

Funding social security programs have a 12.4% taxable rate. 6.2% comes from the employee and the other half from the employer. Medicare programs come at a lower tax percentage of 2.9%, meaning that employees take on a 1.45% burden.

Overall, the 15.3% tax should be split between employee and employer. However, be rigorous in your understanding of a fair wage in your role. Some employers may use lower wages to cover this 6.2% tax needed on their behalf.

Your Funding Tree shares that over 50% of employers outsource payroll and tax services. You would be wise to follow suit as even a tiny inconsistency can lead to significant pain when it comes to quarterly or yearly taxes.

Self-Employment and Payroll Tax

Are you a solo entrepreneur with no employees working on the business? Don’t think you can sneak out of payroll taxes!

Self-employed individuals, such as freelancers, pay self-employment taxes. These are very similar to payroll taxes, though the burden is placed solely on the singular person.

You’re still required to meet the 15.3% tax, including a 12.4% social security and 2.9% Medicare cost. As a self-employed worker, pay special attention to setting aside the proper taxes, so you don’t face fees or larger tax burdens down the line.

Take Charge of Payroll Tax

Whether you’re an employee or employer, a payroll tax affects the amount you bring home from your hard work. Make sure to account for the 15.3% tax rate when reviewing wages to make sure you are adequately paid.

Wondering what else impacts your pay grade? Check out our blog for a host of articles that will help you understand business at large.

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