US Payroll Taxes
As the saying goes, taxes are one of those guarantees in life. You're protected by police, you're schooled, and you're paying politicians to make decisions on your behalf. Whether we're talking about a local municipality or the federal government, we are talking big business. The government is the largest employer in the United States, and those folks deserved to be paid just like you, and most of that money comes from your paycheck.
Besides employing many people to administer and provide us with essential services, the government also supplies us with important medical and retirement benefits. With all that as a background, let's take a closer look at the types of payroll taxes we pay.
Types of Payroll Taxes
Withholding of payroll taxes is normally the responsibility of your employer. If you're self-employed, then you need to tend to this matter yourself. In the United States, employers are responsible for withholding federal income taxes, Social Security, and Medicare taxes. In many states, your employer may also be responsible for withholding a state income tax or even a municipal income tax.
Federal Income Taxes
Federal income taxes are used to support the activities of the federal government. Some of the larger expenditures of the federal government include the military, energy exploration, education, science, and human services.
Generally, the amount of tax you pay increases as your gross income increases. That is a general rule, because you pay taxes based on your adjusted gross income, which accounts for all sources of income as well as tax deductions. When you're done making your income adjustments, you use tax tables or a table of tax brackets to calculate your actual federal income tax liability, which is then compared to the taxes withheld from your paycheck over the last year.
FICA - Federal Insurance Contributions Act
Under the Federal Insurance Contributions Act, or FICA, approximately 15.3% of your earned income is paid into the two components of FICA: Social Security and Medicare. If you're a salaried employee, then your employer is responsible for paying half of all the FICA taxes due. For many of us, that means we're paying around 7.65% into these two programs.
Social Security
We usually think of Social Security as a source of retirement income. But it also provides income to the disabled, health care insurance for the aged, and unemployment compensation. There is a limit on how much Social Security tax you pay each year. For example, in 2012 the limit is $6,826.20, and that is based on a 6.2% tax on the $110,100 income limit. (Note: The reduction to the Social Security withholding rate from 6.20% to 4.20% of wages that began in 2011 was extended through February 29, 2012.)
Medicare
Medicare is a health insurance program for individuals age 65 and older, or persons with certain disabilities. Unlike Social Security, there is no income limit on Medicare payroll taxes. For many of us, that means we're paying 1.45% of our gross income into the Medicare fund to pay for these important services.
State Income Taxes
If you live in the states of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, then you don't need to worry about state income taxes because you have none. For the rest of us, there is a complex set of tax brackets and income tax rates that apply to each state.
As is the case with federal income taxes, you pay state income taxes after taking credit for deductions or exclusions. For a brief overview of this topic, you can take a look at our publication on State Income Taxes.
Municipal Taxes
In general, most of the larger cities across the United States charge a municipal income tax or city tax. The rates of certain cities can be quite high. For example New York City charges a payroll tax in the area of 3%. Unlike federal and state taxes, you are usually charged municipal income taxes based on where you work and not where you live.
For example, if you live in New Jersey and work in New York City, then you pay federal income taxes, New Jersey state income taxes, and city taxes are owed to New York City.
State Income Tax Trivia
Before we get to the tax rates, we'd like to share some state income tax trivia.
· There are currently seven states that do not collect any state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
· There are two states that only collect income taxes on dividends and interest income: New Hampshire and Tennessee.
· Hawaii and Oregon have the highest incremental state tax rate: 11.0%.
· Seven states have only one income tax bracket, charging its residents one rate on all income, which is called a flat rate: Colorado (4.63%), Illinois (5.0%), Indiana (3.4%), Massachusetts (5.3%), Michigan (4.35%), Pennsylvania (3.07%) and Utah (5.0%).
· Hawaii also has the largest number of tax brackets (12), ranging from 1.4 to 11.0%.
Employer Payroll Tax Forms:
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Form 941, Employer’s Quarterly Federal Tax Return
Form 2553, Election by a Small Business Corporation, is used by small businesses to elect to be taxed as a "Subchapter S - Corporation" (S corporation).
Employee Payroll Tax Forms:
The Form 1040A ("short form"), U.S. individual income tax return, is a shorter version of the Form 1040. Use of Form 1040A is limited to taxpayers with taxable income below $100,000 who take the standard deduction instead of itemizing deductions.
The Form 1040EZ ("easy form"), Income Tax Return for Single and Joint Filers With No Dependents, is the simplest, six-section Federal income tax return, introduced in 1982. Its use is limited to taxpayers with taxable income below $100,000 (as of tax year 2011) who take the standard deduction instead of itemizing deductions.
ref:
Payroll Taxes - http://www.money-zine.com/
IRS Online tax learning - http://www.irs.gov/businesses/
Filing and Paying Your Business Taxes - http://www.irs.gov/businesses/
Electronic Payment Options Home Page - http://www.irs.gov/efile/
Income tax publications - http://www.irs.gov/
Tax Guide 2012(Publication 15) - http://www.irs.gov/pub/irs-pdf/p15.pdf
Tax Guide 2011 - http://www.irs.gov/pub/irs-
Federal Income Tax rules - http://www.money-zine.com/
