What is Payroll Tax?
Payroll tax refers to the taxes employees and employers pay on wages, tips, salaries, commission, bonuses and also some taxable cash equivalent benefits that may be awarded to an employee (such as immediately accrued stock grants, employee incentive trips, per diem above the IRS limit, and much more). These taxes are implemented at the federal, state, and local level.
Types of Payroll Tax
Federal payroll taxes include contributions to Social Security and Medicare, collectively known as the Federal Insurance Contributions Act (FICA) tax.
These are labeled as MedFICA and FICA on pay stubs. To figure out how much tax to withhold, use the employee’s Form W-4, Employee’s Withholding Certificate, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods.
Social Security Tax is tax is levied on both employees and employers to fund the Social Security program. The Social Security tax is 6.2%, paid by both the employee and the employer, for a total of 12.4%. Income above $160,200 in 2023 (and $168,600 in 2024) is not taxed for Social Security.
Medicare Tax is also split between employers and employees to fund the Medicare program, which provides health insurance for people aged 65 and older. These payroll deductions go into one of two separate trust funds: the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund.
The tax for Medicare is 1.45% for the employer and 1.45% for the employee, for a total Medicare tax of 2.9%. For individuals that earn over $200,000, an additional 0.9% is charged.
The Hospital Insurance Trust Fund pays for Medicare Part A which assists in covering hospital care, skilled inpatient care, and in some cases, home care.
The Supplementary Medical Insurance Trust assists in paying for Medicare Parts B and D, which covers laboratory tests and screenings, outpatient care, x-rays, ambulance services, and many additional costs.
At the state level the most common tax is SUI/SUTA which pays into state funds to compensate workers who claim unemployment benefits.
Tax for the self-employed
Self-Employment Tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most employees.
Why is it important for recruitment companies to understand Payroll Tax in the US?
Understanding how taxes are calculated can help recruiters and candidates accurately assess take-home pay after deductions and also the employer’s burden. This knowledge can facilitate more informed negotiations about salary and benefits and also help recruitment firms understands their costs of labor. Working with a specialist EOR can help you navigate those challenges – get in touch today.