By law, payroll taxes must be withheld from an employee’s paycheck. There are two types of taxes that can be described by the term payroll tax. The statutory and the voluntary. They are both rendered for payroll tax deductions. With statutory payroll tax deductions, amounts are withheld from an employee’s paycheck by their employer. They send the withheld amount to the proper force whether it be local, state or federal.
The second type of payroll deduction is voluntary. The employee is presented with different types of benefits offered by the company. They then agree upon the deductions that will be taken from their wages.
Withholding Taxes
Withholding taxes is basically the IRS taking the money from each paycheck and withholding your awaited yearly refund as you earn it. The state and federal government collect taxes which are withheld by employers. These withheld taxes help to supply government funded programs like Social Security, unemployment compensation, worker’s compensation and medicare.
Deductions usually vary from year to year and rely upon the employee’s salary and their tax filing status meaning if they are single or married. Because different states, cities, and counties have different requirements, the employers may withhold taxes according to the regulations of where they are located. It is the employer’s responsibility to collect the income tax that is withheld, social security and Medicare and send them to the IRS.
Statutory Tax Deductions
Payroll tax deductions include but are not limited to federal income tax withholding, state income tax withholding, and several local tax withholding and as mentioned before, Social Security tax and Medicare. These tax deductions are called statutory payroll tax deductions.
Federal income tax withholding is the largest statutory payroll tax deduction. They are calculated by each year’s payroll tax deduction’s chart.
Voluntary Payroll Tax Deductions
Voluntary payroll tax deductions include but are not limited to 401k contributions, pre-tax commuter benefits and health insurance premiums for insurance sponsored by employers. They also include, like insurance premiums, employee stock purchase and other job related expenses such as meals and uniforms.
These deductions come off employee paychecks only if they have an agreement to these deductions for benefits. It is at the discretion of the employee and the demand of their life.
There are many options that come with voluntary payroll tax deductions. You can choose to between pre and post-tax deductions. For example you can make post-tax contributions to a 401k and a pre-tax to an IRA. If the money for both come out of you r paycheck before it has entered your account, they are considered payroll tax deductions.
Employer Payroll Tax Deductions
The employer’s role in it all is to pay their share of payroll taxes, prepare reconciliation reports, and account for payroll expense in their financial reporting and to file payroll tax returns. The employer is responsible for payroll taxes after their employees have received their paychecks and depositing tax dollars that are withheld from the paychecks of employees.
They are also held accountable for a portion of the payroll taxes paid to the taxing authorities. These payroll taxes cab be considered an additional expense over and above the expense of an employee’s gross pay.
More Facts about Payroll Tax Deductions
Both employees and employers contribute 6.2% for Social Security taxes and 1.45% for Medicare taxes.
The Federal Insurance Contributions Act (FICA) tax lists the Social Security and Medicare taxes paid by both the employer and the employees.
The employees and employers pay 6.2% each for Social Security and 1.45% each for Medicare. The employer pays half and the employee pay the other half. It adds up to 15.3%. According to ‘the balance’, in 2013 additional Medicare tax applied to employee’s whose Medicare wages surpassed $200,000. In 2011 the employee part of the social security tax went down to 4.2%.