The deadline for filing your 2020 taxes is May 17, 2021. Here’s what else to know.
What are payroll taxes?
Payroll taxes are taxes that employees and employers must pay based on wages and tips earned and salaries paid to employees. The employee pays part of these taxes through a payroll deduction, and the employer pays the rest directly to the IRS.
There are four basic types of payroll taxes: federal income, Social Security, Medicare, and federal unemployment. Employees must pay Social Security and Medicare taxes through payroll deductions, and most employers also deduct federal income tax payments. The income tax deduction varies, depending on the employee’s withholding status, but all employees pay 15.3 percent of their earnings as FICA tax. Employers pay federal unemployment tax, and the IRS explicitly states that employers may not deduct this cost from their employees.
Unlike federal income tax that goes to the government’s general fund, FICA taxes fund only Social Security and Medicare program. The employee pays a 6.2 percent tax for Social Security expenses and 1.45 percent for Medicare. The employer must match the deduction and send the total amount to the IRS. Self-employed individuals pay 15.3 percent of their wages, which includes both the employer and employee portion of the tax.
Payroll taxes example
You can see how much you pay in payroll taxes by looking at your pay stub. Find the line item for FICA taxes, which may have one of the following designations: Social Security, Medicare, SS, SSWT, MWT, Med, FICA SS or FICA Med. The amount listed on those lines should equal 7.65 percent of the gross income for the pay period.
For example, if you earned $1,000 during the pay period, your employer deducted $76.50 for payroll taxes, leaving $923.50. Your employer most likely also deducts a percentage of your wages for income taxes as well as employee contributions to benefits such as health and dental plans and retirement accounts. The amount of money left over is your net income.
Are you thinking about retirement and wondering if FICA payroll taxes will be enough to cover your expenses? Use our retirement calculator to determine how much you need when you retire.