Payroll taxes are a type of tax that is assessed on employee earnings. These taxes typically go toward national security programs. Employers are responsible for withholding these taxes from employee paychecks. They will either pay the rest of the tax bill or receive a tax refund. This article will help you understand payroll taxes and their balancing act. We will cover the different types of payroll taxes, Social Security, Medicare, and MEDFICA.
Payroll Tax Balancing Act
The payroll tax balancing act is a difficult one to master. When payroll software mistakes, the fines are redirected to the business owner; even worse, if the business owner fails to pay the fine, the IRS may take personal assets and refunds from individual income tax returns to compensate for the damage. If this happens, taxpayers may not be so happy about it, but it can help you to purchase a new destroyer.
Social Security
Since Social Security is not an individual account, payroll taxes and Social Security benefits go into a shared pool. By 2034, payroll taxes will only be able to fund 78% of benefit checks. By then, the federal retirement reserves are expected to be depleted, and payroll taxes will no longer cover benefits. The government will either need to borrow money or raise taxes by then. Or it will cut benefits. The trust fund will remain in surplus until 2037 when payroll taxes no longer cover social security benefits.
While payroll taxes finance most of Social Security, they only invest part of Medicare. For example, only Medicare Part A, which covers hospital insurance, is funded by payroll taxes. Parts B and D are paid for with premiums and general revenues. Therefore, it is difficult to determine the impact of payroll tax reductions on Social Security benefits. However, the current economic crisis is an excellent time to examine the relationship between payroll taxes and Social Security.
Medicare
Whether self-employed or an employee, you will pay Medicare and payroll taxes. These two federal taxes require both the employee and the employer to withhold a portion from their paychecks. Medicare tax amounts to about 1.45% of a person’s annual salary, or $60 per month. Employers and self-employed individuals both pay this tax, but for different purposes. The employee version of the tax is deducted from a person’s paycheck, while the employer version is sent to the IRS via regular electronic deposits.
If you are an employee, the standard Medicare tax rate is 1.45%, and your employer pays the other half. However, if you are self-employed, you must pay 2.9% of your salary. Self-employed individuals must also pay the 2.9% self-employment tax, delivered through estimated quarterly payments. For the first two years of a calendar year, employers must withhold the additional 0.9% Medicare tax, and the self-employed must pay the extra 1.45%.
MEDFICA
FICA and MEDFICA are two of the most important social insurance taxes. These taxes appear on your pay stubs and cover 7.65 percent of wages. Employers remit half of these taxes, and the other half is deducted from your paycheck. If you are unsure how to calculate your payroll taxes, check out the information below. In addition, medications are taxed differently for different types of workers.
In addition to the Social Security tax, employers must also withhold Medicare tax from employee wages. FICA and Medicare taxes can vary from state to state, so employers in a multi-state business must pay attention to which state allowances they must follow. The federal government requires that employers withhold 7.65% of employees’ pay for Social Security and Medicare. MEDFICA taxes do not have a cap, but employees who make more than $200k a year must pay an additional.9% surtax on their Medicare payments.
Employer
There are many facets to a business’ payroll taxes. These taxes are often withheld from employees’ paychecks and sent to the Internal Revenue Service (IRS). The average employee contribution is 7.65%, of which about a fifth goes to Social Security and Medicare. Employers are also responsible for withholding state and local taxes, known as employment taxes. The IRS publishes an overview of these taxes in publication 15, considered the definitive guide to federal payroll taxes.
The Social Security, Medicare, and other payroll taxes employees pay are shared between the employer and the employees. Employers are responsible for withholding these taxes for their employees, but they also have to match the amount of these payments. For more information, contact an accountant. Sonya Muenchen, an experienced payroll tax consultant for small businesses, is available to answer any questions you may have. She has been in the industry for over 20 years and advises small business owners on payroll tax issues.
