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Introduction To Payroll Taxes

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.

Employee
Employer
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
3. Federal Unemployment 0 N/A 0.8% 7000.00
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
Marriage Status
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.

Sample Examples:

Let's consider one typical example:

Annual Salary $125,000  
Monthly Salary $10416.67 125000/12
Married Status Married  
Total Exemptions 3 One for Taxpayers, One for Spouse, One for Child (Family of 3 members and spouse is not working)
Pay Cycle Monthly  
Monthly Gross Salary $10416.67  
     
Deductions    
Social Security Tax 645.83 @6.2%
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 Insurance 39.84 @0.3825%
NJ Health Care Subsidy 0.00  
NJ Workforce Development 4.43 @0.0425%
NJ Disability Insurance 52.08 @0.5%
     
Total Withholding/Deductions 3169.55  
     
Net Salary 7247.12  
     
Employer's Payroll Taxes    
     
Federal Unemployment 56.00 @0.8% 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
     
Total Deductions 34938.78  
     
Total Net 90061.22  
     
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
     
Total 8270.21  

Courtesy Presentation by Keshav Lal CPA