Employers are required to deduct payroll taxes from their workers' paychecks and send those funds to the relevant taxation authorities, not only on behalf of their workers but also on their behalf. Employers are responsible for collecting and paying these taxes as part of their organization's payroll procedure.

How Payroll Taxes Work

The number of your wages subject to payroll taxes is expressed as a percentage. Typically, your company will pay half of this percentage, and you will be responsible for the other half via your paycheck withholding. To comply with the law, employers must deduct a portion of their workers' taxes and report the total pay on Form W-2. After the end of the year, the information on your contributions will be sent to the IRS by your employer.

The money must be kept in a separate account and sent to the federal government monthly or biweekly. Employers are responsible for opening and maintaining these accounts. You must make quarterly payments if you owe more than $500 in unemployment taxes. Employers are the ones who are liable for paying any of the unemployment tax that their employees owe.

Payroll taxes create considerable income. According to the Center on Budget and Policy Priorities, their total earnings in 2019 amounted to 1.24 quadrillion dollars. This accounts for 35.9% of the total revenues collected by the government and 5.9% of its GDP. Payroll taxes brought in a total of $914 billion only for Social Security, making it the second-highest source of revenue for the federal government, behind only individual income taxes.

Categories of Payroll Taxes

Social Security Tax

The rate of 12.4% is applied to this payroll tax. The remaining 1.8% is allocated to disability insurance, while the remaining 10.6% is contributed to an OASI fund that provides survivors retirement benefits. Only earnings of up to $142,800 per year in 2021 (or $147,000 per year in 2022) will be subject to the Social Security tax. Earnings over $142,800 (in 2021) are exempt from the Social Security tax; however, this exemption only applies to the year's remaining months. You are responsible for paying this tax on any profits that are more than or equal to this amount, with the earnings counter being reset on January 1 of the following year.

Medicare Tax

HI throughout the country is paid for by taxes collected under the Medicare program. Individuals who meet the criteria are eligible to have their hospital stays, some types of home health care, and hospice care paid for by the payroll tax. The Medicare payroll tax contributes to the Medicare Part A benefits that are provided to elderly taxpayers and individuals with certain diseases or disabilities. Other components of Medicare are not included in the coverage. The total tax is 2.9%, of which the employee and employer contribute 1.45%. This tax was restricted to a certain level of yearly earnings until it was removed from federal legislation in 1994.

Since the program's inception, the Medicare tax has been applied to Medicare Advantage plans as well as the expenses of prescription drugs. In 2019, the year that was the final one to pass before the impacts of the pandemic corrupted the statistics, it contributed 36% to these initiatives. There is no limit on the amount of salary or earnings that may be subject to the Medicare tax. Individuals with high incomes are subject to an additional tax known as the Additional Medicare tax. Self-employed taxpayers are subject to the same Social Security and Medicare contribution rates. The only difference is that they have to pay the whole % rather than just half of it.

Unemployment Tax

Workers laid off are eligible to receive unemployment compensation from their respective states. The provision of this program is a collaborative effort between the federal government and the states. When employers pay unemployment insurance taxes, the money goes into a government trust fund. The workers are exempt from contributing to the payroll tax. The unemployment insurance tax rate is 6% of wages paid up to $7,000, although the federal government offers tax credits that may reduce this to only 0.6% of the total amount. Additionally, payment of unemployment tax is required to be made at the state level.

Additional Medicare Tax

Additional Medicare Tax is 0.9%, and employers must deduct this amount from a worker's salary; however, employers are not required to contribute an equal amount to this tax. Only those with incomes of more than $200,000 or $250,000 are required to pay it. If you and your spouse choose to file your taxes separately, the income threshold reduces to only $125,000.