How to Calculate Payroll Taxes: Taxes and Percentages
Calculating payroll taxes is a detailed process as there are a number of federal and state taxes to be applied. As well, some taxes are paid by the employee, others paid only by the employer, and some are shared by both.
Typical payroll taxes include: federal, state and local income taxes, social security and Medicare, unemployment, disability insurance and workers’ compensation.
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NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Are Payroll Taxes?
When a person works for a company full-time, both the worker and the employer are subjected to a variety of taxes. These taxes are known as “Payroll Taxes”. The employer withholds these amounts from the worker’s paychecks, and submits them along with the company’s contributions, to the government. The implementation of these taxes, and their withholding, are required by law.
Payroll taxes can include the following:
- Federal income taxes (paid by the employee)
- State and local income taxes (not all states charge income tax. See: Which States Do Not Withhold Taxes?)
- Social Security and Medicare taxes (these are called FICA taxes, which stand for “Federal Insurance Contributions Act.” This tax is split 50/50 between employee and employer)
- Federal Unemployment Tax Act (or “FUTA”. This is paid by the employer)
- State Unemployment Tax Act (or “SUTA”. Paid by the employer in most states)
- State Disability Insurance (paid by employer, employee, or both)
- Workers’ Compensation (this is a state tax, paid by the employer)
What Is the Percentage of Federal Taxes Taken out of a Paycheck?
There is no universal federal income tax percentage that is applied to everyone. This is because all employees are required to fill out a W-4 form (“Employee’s Withholding Allowance Certificate”), when hired at a company. The information an employee provides on this form, such as marital status, or number of children and dependents, along with the employee’s gross salary, will determine the amount of federal income taxes taken off of an employee’s check. There are seven different income tax brackets.
The other federal taxes do have standard amounts, they are as follows:
Social Security tax
12.4%. This is divided up so that both employer and employee pay 6.2% each.
There is a wage base limit on this tax. For the 2019 tax year, the maximum income amount that can be subjected to this tax, is $132,900.
2.9%. Also divided up so that both employer and employee each pay 1.45%.
There is no wage base limit for Medicare. However, an extra .9% must be withheld for employees making in excess of $200,000 per year (the employer does not share this extra tax, it is paid only be the employee).
FUTA (Federal Unemployment Tax Act)
6.0%. This is applied only to the first $7,000 in earnings an employee makes (in every tax year). This tax is not shared, it is paid only by the employer.
Do Sole Proprietors Pay Payroll Taxes?
Self-employed individuals must also pay their federal and state taxes, along with social security and Medicare (they don’t pay FUTA or SUTA). The differences are:
- Self-employed individuals pay the full amount once per year, when filing their personal income tax returns.
- Self-employed individuals have to pay the full amounts themselves. Because they are self-employed, there is no employer to share the costs with.
It is advisable that self-employed individuals put aside a certain percentage of their small business earnings throughout the year, so that they are prepared and capable of paying the taxes owed, at tax time.
Are Payroll Taxes Tax Deductible?
Certain payroll taxes are deductible to a business paying them on behalf of their employees, but they are not deductible by the employees themselves. A business cannot deduct federal income taxes (because the employee paid them), but can claim tax deductions for Social Security, Medicare and FUTA taxes.
Which States Do Not Withhold Taxes?
The following states do not have a state income tax:
- New Hampshire
- South Dakota
- Washington, D.C.
Tennessee and New Hampshire only impose tax on income from dividends and interest.