Payroll tax
From Wikipedia, the free encyclopedia
Payroll tax generally refers to two kinds of taxes: Taxes which employers are required to withhold from employees' pay, also known as withholding, Pay-As-You-Earn (PAYE) or Pay-As-You-Go (PAYG) tax; or taxes directly related to employing a worker paid from the employer's own funds: these may be either fixed charges or proportionally linked to an employee's pay.
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[edit] Australia
In Australia, the Payroll Tax is a specific tax which is paid to the individual states and territories by employers not employees. It is not a deduction from the worker. The Australian Government itself only requires one tax withheld from paychecks, the PAYG (or pay-as-you-go) tax which includes medicare levies.
[edit] Brazil
In Brazil employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system, and depending on the company's main activity, must also contribute to federally-funded insurance and educational programs. There is also a required deposit of 8% of the employee's wages into a bank account that can only be withdrawn from when the employee is fired or certain other extraordinary circumstances (called a "Security Fund for Duration of Employment"). All these contributions amount to a total tax burden of almost 40% of the payroll for the employer and 15% of the employee's wages.
[edit] United Kingdom
In the United Kingdom, Income tax for employees and Employees' National Insurance contributions are examples of the first kind of payroll tax, while Employers' National Insurance contributions are an example of the second kind of payroll tax.
[edit] United States
In the United States, employers are required to withhold federal income tax, plus one-half of the Social Security tax, and one-half of the Medicare tax. Together, the employer's and employee's shares of the Social Security and Medicare taxes are known as the FICA tax. In some places, employers may be required to withhold state income tax, or even city income tax. In addition the employer is required to pay State and Federal unemployment tax.
[edit] Social security and Medicare taxes
Social security and Medicare taxes, also known as FICA taxes must be withheld from your employees' wages. As an employer, you must also pay a matching amount of FICA taxes for your employees. As of 2007, the social security tax rate is 6.2%. The employee must have 6.2% withheld from their wages for social security taxes and the employer pays a matching amount in social security taxes until the employee reaches the wage base for the year. The wage base for social security tax in 2006 is $94,200 and for 2007 increases to $97,500. Once that amount is earned, neither the employee or the employer owes any social security tax.
The Medicare tax rate is 2.9% for the employee and the employer. The employer must withhold 1.45% of an employee's wages and pay a matching amount for Medicare tax. Unlike the Social security tax, there is no maximum wage base for the Medicare portion of the FICA tax. Both the employer and the employee continue to pay Medicare tax, no matter how much is earned.
[edit] Unemployment taxes
Each employer also must pay State and Federal Unemployment Taxes (SUTA and FUTA). The FUTA rate is 6.2% but normally nets to .8% because the employer is allowed to take a credit of up to 5.4% for SUTA taxes that it pays. This will be the case if you are eligible for the maximum credit your FUTA rate. The wage base for FUTA is $7,000. You will stop paying FUTA for each employee once their earned wages exceed $7,000 per calendar year. Each state has different rate so you will need to check with your state about SUTA tax rates and maximum wage base. Many states require new business to have an average starting rate until an employment history is created. For example, Indiana requires new employers to pay 2.7% for the first 3 years. Afterwards the rate is adjusted depending various factors including if any of their ex-employee filed for unemployment benefits.
[edit] Historical Social Security, employee wage tax base
The following table only shows the taxes collected from the employee. The employer pays another 6.2 percent and through the theory of tax incidence, almost the entire 12.4 percent in payroll taxes ends up being paid for by the employee (half directly to the government, half in the form of lower wages).
| Year | Social Security Wage Base | Social Security Tax Rate | Maximum Annual Social Security Withholding |
|---|---|---|---|
| 2007 | $97,200 | 6.2% | $6,026.40 |
| 2006 | $94,200 | 6.2% | $5,840.40 |
| 2005 | $90,000 | 6.2% | $5,580.00 |
| 2004 | $87,900 | 6.2% | $5,449.80 |
| 2003 | $87,000 | 6.2% | $5,394.00 |
| 2001 | $80,400 | 6.2% | $4,984.80 |
| 2000 | $76,200 | 6.2% | $4,724.40 |
| 1999 | $72,600 | 6.2% | $4,501.20 |
| 1998 | $68,400 | 6.2% | $4,240.80 |
| 1997 | $65,400 | 6.2% | $4,054.80 |
| 1996 | $62,700 | 6.2% | $3,887.40 |
| 1995 | $61,200 | 6.2% | $3,794.40 |
| 1994 | $60,600 | 6.2% | $3,757.20 |
| 1993 | $57,600 | 6.2% | $3,571.20 |
| 1992 | $55,500 | 6.2% | $3,441.00 |
| 1991 | $53,400 | 6.2% | $3,310.80 |
For information on Federal payroll tax requirements, check out IRS publication 15, Circular E. For information on State payroll tax requirements, contact your state's taxation and revenue department.
