This has always been an issue with all types of employees and for some employers to understand the payroll taxes. The detail and complex discussion will be out of scope from this article, but we can provide a basic introduction to payroll taxes.
People always come up with question how much percentage goes into payroll taxes?? There is no straight forward percentage rather it is a combination of several types of taxes, and each type has its own rate and base amount. Similarly each type of tax has its own coverage and relating to certain benefit program.
Why we have so many payroll Taxes?? Because all these deductions go to different benefit programs as defined by Federal and State Governments.
People come up with the question that I have so much deduction from paycheck and why I am not getting refund?? Because your all payroll deductions are not of income tax deductions rather meant for different benefit programs defined by Federal and State. You will be benefited from these programs in future and on being qualified and eligible.
Some people are upset about so much and so many payroll Taxes. But there should be no reason as you see the benefits attached with such deductions. They whole system is for our welfare and financial help during old age, sickness, disability and unemployment.
Would these benefits be enough for an individual?? No. Such benefits may be limited and may not be sufficient to meet individual needs. Most of such benefits will depend on length of services and total gross taxable salary. Therefore people may have to plan well ahead of time to participate in other private and additional plans.
List of Payroll Taxes: There is a list of taxes those are systematically withheld (deducted) from the salary of an employee by the employer and are remitted to related Federal and State Tax agencies. The payroll deduction process is well defined by the IRS and State where employer has almost no choice. Regarding payroll taxes employer is a trustee and does fiduciary duties between employee and tax agencies.
In addition to employee's salary/wage deductions of different taxes, an employer has also to pay payroll taxes as its responsibility. Employer's payroll taxes are also well defined and are to be contributed systematically as per prescribed rates and tax bases.
We would like to provide you the list of such taxes by using New Jersey State and year 2005.
|Sl.#||DESCRIPTION||RATE||BASE AMOUNT||RATE||BASE AMOUNT|
|1.||Social Security Tax||6.2%||90000.00||6.2%||90000.00|
|2.||Medicare Tax||1.45%||No Limit||1.45%||No Limit|
|4.||Federal Income Tax Withholding||As per Tax Brackets and Tax Tables||No Limit||N/A||N/A|
|5.||State Income Tax Withholding||As per Tax Brackets and Tax Tables||No Limit||N/A||N/A|
|6.||NJ Unemployment Insurance||0.3825%||24900.00||2.4825%||24900.00|
|7.||NJ Health Care Subsidy||0.00||N/A||0.2%||24900.00|
|8.||NJ Workforce Development||.0425%||24900.00||.1175%||24900.00|
|9.||NJ Disability Insurance||0.5%||24900.00||0.5%||24900.00|
*Income Tax is withheld according to tax brackets and tax tables set by IRS and State Tax Agencies. The amount of withholding will depend on several factors such as:
Amount of Gross Salary
Number of Dependents
If Both husband- wife are working
If eligible for any child credits
Or if taxpayer needs additional tax withholding.
Income tax is a tax on income, income from all sources including salary and it is only employees' responsibility. Employer is more concerned about deduction of income tax from salary as per information provided by the employee by using form W-4. Final Tax liability will be employee's own responsibility at the yearend when he/she will prepare and file his/her personal tax return. As a computation of yearend tax liability, an employee may receive a refund on account of over withholding or may have to pay additional tax amount on account less withholding. IRS/State assesses additional amount on account of interest and penalties on less withholding if such shortage is out of defined limits.
**State Tax Rates are defined by the State for each entity by using its own experience rates. We are using just a basic example.
Let's consider one typical example:
|Total Exemptions||3||One for Taxpayers, One for Spouse, One for Child (Family of 3 members and spouse is not working)|
|Monthly Gross Salary||$10416.67|
|Social Security Taxfirstname.lastname@example.org%|
|Medicare Tax||151.04||@ 1.45%|
|Federal Income Tax Withholding||1758.00||As per Tax Tables|
|NJ Income Tax Withholding||518.33||As per Tax Tables|
|NJ unemployment Insuranceemail@example.com%|
|NJ Health Care Subsidy||0.00|
|NJ Workforce Developmentfirstname.lastname@example.org%|
|NJ Disability Insuranceemail@example.com%|
|Employer's Payroll Taxes|
|Federal Unemploymentfirstname.lastname@example.org% Base amount 7000.00|
|Employer's matching Social Security Tax||645.83||@ 6.2%|
|Employer's matching Medicare Tax||151.05||@ 1.45%|
|NJ Unemployment Tax||258.59||@ 2.4825%|
|NJ Healthcare Subsidy||20.83||@ 0.2%|
|NJ Workforce Development||12.24||@ 0.1175%|
|NJ Disability Insurance||52.08||@ 0.5%|
|Total Employer's Taxes||1196.62|
The Employee's and Employer's tax liability will be over on salary beyond tax basis for certain taxes.
Let's presume that the employee's job position stays the same whole year ( Jan 01-Dec 31). In such a case the situation with payroll taxes at the yearend should be as follow:-
|Annual Gross Salary||125000.00|
|Annual Social Security Tax @6.2%||5580.00||Base Amount 90000.00|
|Annual Medicare Tax @ 1.45%||1812.50||No Limit|
|Federal Income Tax Withholding||21096.00||No Limit|
|NJ State Income Tax Withholding||6219.96||No Limit|
|NJ Unemployment Insurance @ 0.3825%||95.24||Base Amount 24900.00|
|NJ Health Care Subsidy||0.00|
|NJ Workforce Development @ .0425%||10.58||Base Amount 24900.00|
|NJ Disability Insurance @.5%||124.50||Base Amount 24900.00|
|Employer's Payroll Tax Liability:|
|Federal Unemployment Tax @ 0.8%||56.00||Base Amount 7000.00|
|Social Security Tax @ 6.2%||5580.00||Base Amount 90000.00|
|Medicare Tax @ 1.45%||1812.50||No Limit|
|NJ Unemployment Insurance @ 2.4825%||618.15||Base Amount 24900.00|
|NJ Healthcare Subsidy @ .2%||49.80||Base Amount 24900.00|
|NJ Workforce Development @ 0.1175%||29.26||Base Amount 24900.00|
|NJ Disability @0.5%||124.50||Base Amount 24900.00|
Courtesy Presentation by Keshav Lal CPA