What is the payroll tax? a federal tax levied on earned income
What is the payroll tax?
When you earn a salary in the United States, that income is subject to payroll tax. Federal payroll tax includes Social Security and health insurance taxes, called FICA. The revenues from these taxes finance social insurance programs. You can also pay payroll taxes in your state.
The total payroll tax for which employees are responsible is equal to 7.65% of their income – a 6.2% social security tax and a 1.45% health insurance tax. Income over $ 142,800 in 2021 is not subject to social security tax. This limit is adjusted annually.
If you earn more than $ 200,000 per year, or $ 250,000 if you declare taxes jointly, you are also subject to a health insurance surcharge of 0.9%.
These taxes are withheld from your salary by your employer, who is also responsible for paying an identical 7.65% tax on your income. And they pay FUTA, a separate tax that finances unemployment programs, on your behalf.
If you are self employed, you have to cover both parts of the FICA tax for a total of 15.3% of your income, this is called the self-employment tax.
What is the difference between payroll tax and income tax?
Payroll tax and income tax may appear side by side on your pay stub, but these two taxes serve different purposes. Payroll taxes are spent on social security and health insurance programs, while income tax pays a large portion of the federal government’s annual budget.
Income taxes are charged based on what you earn each year. For 2021, marginal tax rates ranging from 10% to 37%. With income taxes, you will pay more as you earn more. Payroll tax is more like a flat tax or regressive tax, as everyone pays the same rate up to the annual income limit and a lower effective rate on higher income.
Where can I find my payroll tax?
If you want to see exactly how much payroll taxes you are contributing, check your pay stub for the current period and running totals for the year. When you complete your income tax return, you will also see your payroll taxes, income taxes, and other withholding taxes on your Form W-2.
As you can see in the pay stub example below, there are five different deductions. The second tax, FICA, stands for Social Security taxes, and Medicare tax is less than that.
Your state might have additional taxes or withholdings, as shown here for California.
While your employer, tax software, or an accountant can do most of the math for you, understanding your taxes is important to supporting your personal finances.