Shelby Hiter is a technology writer and editor who previously managed editorial strategy for TechRepublic, Webopedia, LinuxToday, and SoftwarePundit. Her work has appeared in online…
Shannon is a writer and editor focusing on the tech space. She has previously worked as an editor for Healthline and MedicalNewsToday. She also covers…
Whether you are a small business owner or the CEO of a multinational corporation, understanding how to calculate payroll taxes can save you a lot of trouble in the long run. It’s necessary to keep up with how U.S. payroll taxes and regulations change over time, as even the most minor infractions can lead to Internal Revenue Service (IRS) penalties, hefty interest charges and accruals, audits, legal issues, and reputational damage.
The best way to avoid these kinds of problems is to develop an in-depth understanding of payroll taxes and what tools can assist you in maintaining error-free payroll records and tax filings. In this guide, you’ll find more information about different types of payroll taxes as well as helpful resources for completing your taxes more efficiently and accurately.
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With the various federal, state, and local taxes that impact employees’ wages, it can be difficult to identify all applicable taxes and perfect your payroll runs for absolute compliance. To achieve the best possible results, your organization’s leaders must understand what payroll taxes are, the different types of taxes that apply, and how you can best collect and maintain the information necessary to file payroll taxes.
Payroll taxes are taxes imposed on employers and employees based on employees’ taxable incomes, which may include salaries, bonuses, commissions, tips, and more. These taxes are calculated based on preset tax rate percentages — determined by government entities — and are levied at federal, state, and local levels.
Several federal taxes impact all employers and employees, while unique state and local taxes apply to your particular workforce or individual members. These are the main types of payroll taxes:
The best way to file payroll taxes accurately is by proactively gathering relevant demographic, tax, and other information from your employees, typically through Form W-4.
Federal income taxes are taxes paid to the federal government on an annual basis and are calculated based on an employee’s annual income. The tax is a percentage of their total earnings and is determined based on the tax bracket within which their income falls.
The IRS tax tables can help employees determine how much they owe in federal income taxes for that year based on their annual income, filing status, and any changes that have impacted tax brackets or rates since their previous annual filing.
The Social Security tax is collected by the SSA to fund various benefits for eligible U.S. citizens. All employed workers and their respective employers are responsible for paying social security taxes on an annual basis.
To determine taxable wages, you’ll need to consider all wages earned, including salaries, overtime payments, bonuses, tips that amount to more than $20 in a calendar month, commissions, and income that comes from self-employment.
While some deductions like health insurance premiums and retirement contributions impact federal income taxes and taxable income, these deductions do not impact Social Security taxes.
The current set tax rates for Social Security are 6.2% for the employer and 6.2% for the employee, amounting to a total of 12.4%. For example, if an employee earns a taxable income of $50,000 per year, the employer will owe 6.2% of $50,000 — $3,100 — in Social Security taxes for that particular employee. The employee will also owe $3,100 for Social Security taxes that year. Self-employed individuals will be responsible for the full 12.4%, or $6,200.
Social Security is the only federal tax that includes a wage base limit, otherwise known as maximum taxable earnings. Once an employee’s annual earnings surpass a set number from the IRS, they will not be taxed for any income earned beyond that threshold. In the year 2024, the wage base is set at $168,600.
Medicare tax is a federal tax on employers and employees that was first established by the Additional Medicare Tax and Affordable Care Act (ACA) in 2013. Below, you can learn more about how to calculate and understand medicare taxes within the context of your payroll:
Medicare tax rates are currently set at 1.45% for employees and 1.45% for employers, for a total of 2.9%. For example, if an employee earns a taxable income of $50,000 per year, the employer will owe 1.45% of $50,000 — $725 — in Medicare taxes for that employee in that tax year. The employee will also owe $725 for their portion of the Medicare tax. For self-employed individuals, their tax rate will be the full 2.9% of $50,000, amounting to $1,450.
Unlike the Social Security tax, there is no wage base limit for Medicare. This means that, regardless of how much you earn, all income will be taxed at the Medicare tax rate. So, even if you earn $200,000 and qualify for the wage base limit on Social Security taxes, you and your employer will each have to pay a 1.45% Medicare tax rate on the full $200,000 earnings for that year.
Every state and local region approaches taxes differently. Some employers and employees are subject to both city and state taxes, while others may not even be required to pay a state income tax.
Deductions can decrease your taxable income, and credits can decrease your actual taxes, at least for the federal income tax. Learn more about each of these options below:
While deductions focus on reducing the amount of your income that is considered taxable, credits directly decrease the actual taxes you’ll end up owing, regardless of the actual tax bracket you fall under. So, for example, if you owe $4,000 in taxes but earn a $500 credit, you’ll only owe $3,500. The government designs these tax credits to incentivize positive behaviors, whether that’s contributing to the economy in a certain way or benefiting the environment by using energy-efficient technologies in your home office.
Accurately paying your taxes is a legal obligation in the United States, meaning anyone who does not comply with tax compliance laws may owe penalties, fines, or interest to the IRS. Depending on the severity of noncompliance, civil or criminal charges may also be brought forth.
Tax laws change frequently, as do the forms, rates, and expectations that come with filing them. While it can be challenging to keep up with these changes on your own, many payroll software solutions are designed to stay up-to-date with the changing payroll tax landscape. You can learn more about some of the best payroll software in our guide.
When employers hire employees, they should expect to file several different tax forms each year on behalf of this workforce. Bear in mind that the following forms are those that must be filed by employers for traditional, full-time employees. Other forms, such as Form 1099-MISC, may need to be filed for workers like contractors and freelancers.
Whether you’re an employer or an employee, it may be beneficial to hire a tax professional to manage your taxes as they grow more complex. Working with a dedicated tax professional can help you stay abreast of changing tax rates and regulations, identify optimal deductions and credits, manage multiple income streams or employee types, and even prepare for and respond to IRS audits and communications.
But if you prefer self-service accessibility, a growing number of accounting and payroll software solutions offer the compliance, real-time updates, and knowledge bases necessary to maintain payroll and taxes compliantly. Rippling, ADP, and Gusto are some of the leading solutions in this area; for additional options and in-depth analyses of each of these tools, read about The Best Payroll Software – Top 10 Compared for 2024.
While getting every detail of your payroll taxes right can be tedious, time-intensive, and all-around difficult, developing a clearer understanding of the different types of taxes and what employers and employees need to complete them effectively makes the process run much more smoothly. Additionally, accessing the right resources and investing in relevant assistive software can help you feel more self-assured in the payrolls you run and taxes you file.
Whether you’re confident in your ability to file your payroll taxes or think it’s time to hire professional support, these resources can help you move forward with the answers you need:
Any income earned through professional work or personal services is considered part of your taxable gross income, according to the IRS. This includes wages, salaries, commissions, fees, tips, fringe benefits, and stock options. Other, less payroll-driven forms of taxable income include capital gains and other investment or business income, income received from properties you rent out, royalties, and virtual currencies like cryptocurrency.
Employers calculate federal tax withholding by reviewing an employee’s Form W-4, which includes information about their filing status, whether they have multiple jobs or a working spouse, claimed dependent(s), or other special circumstances like deductions. The form itself offers instructions and calculation tables. The IRS also offers a Tax Withholding Estimator, though they note it should only be used for fairly straightforward tax scenarios.
No, withholding allowances are no longer part of Form W-4 as of 2020. Instead of asking employees to guess what their withholding allowances should be, the new Form W-4 offers detailed categories and instructions for how to more accurately calculate your withholdings based on your filing status, dependents, working spouse, and other factors.
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Shelby Hiter is a technology writer and editor who previously managed editorial strategy for TechRepublic, Webopedia, LinuxToday, and SoftwarePundit. Her work has appeared in online publications such as TechRepublic, eWeek, Datamation, eSecurity Planet, Enterprise Networking Planet, CIO Insight, Project-Management.com, Insurance Thought Leadership, and AllBusiness.com. Over more than five years of working in this space, she has developed particular expertise in artificial intelligence, big data, project management, open-source software, HR, healthcare tech, and fintech. She also specializes in marketing and communication strategies as well as academic writing. Shelby holds a master's degree in Humanities from the University of Chicago. Follow or…
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