A payroll tax is paid by both employers and employees. A percentage is withheld by employers from each employee’s paycheck, and paid to the government. Independent, freelance and self-employed Individuals pay similar self-employment taxes to the government.

The Federal Government imposes 12.4% Social Security Tax. This is split equally between the employer and employee who contribute 6.2% each. The Social Security wage base for 2020 is capped at $137,700. This means individuals who earn over $137,700 in 2020 need not pay Social Security Tax.

Both employers and employees contribute 1.45% each towards a Medicare tax. Individuals earning over $200,000 (or $250,000 if married filing jointly) are liable to pay an additional Medicare tax of 0.9% from their paycheck. There is no wage base limit for Medicare tax.

Who Benefits From A Payroll Tax Cut?

President Donald Trump issued an Executive Order on August 8, 2020, on a Payroll Tax Cut from Sept. 1, through Dec. 31, 2020. Employees, who make less than $4,000 bi-weekly, or $104,000 an year, are eligible for the Payroll tax holiday.

Is Payroll Tax Deferral Optional?

According to an IRS representative, deferring the employee portion of Social Security tax is optional.

Will We Have To Pay Back Payroll Taxes?

According to the President’s Executive Order, Payroll taxes will be deferred, not forgiven. This means, if no further permanent cut is enacted, the deferred taxes will have to be repaid in 2021.

Does Payroll Tax Include Federal Income Tax?

Yes. Part of the Federal Income Tax is included in the employee’s Payroll Tax withholding.
Although the employer will withhold and pay the employees payroll taxes, the employee is responsible for paying the tax shortfall from other sources of income that are not withheld.

What Is The Difference Between Income And Payroll Taxes?

Income Tax is calculated on how much money an individual makes from all sources of income. Income tax is calculated on wages as an employee, any independent work done as a contractor, self-employment earnings, and income from other sources like commissions, bank interest, stock dividends, and gains from sale of assets like property and stock. Income Tax is complex and consists of federal, state, and local income taxes. Income Tax also takes into consideration other factors such as an individual’s income tax bracket, marital status, dependents and mortgage payments apart from employment income.

Payroll Taxes are simple “flat rate” taxes calculated and deducted from an employee’s wages. Payroll Taxes include both Social Security and Medicare taxes. These are known as Federal Insurance Contributions Act (FICA) tax. Employers withhold the employee’s FICA contribution and pay the government Payroll Taxes direct.

What Is Funded By Payroll Taxes?

The Federal Government funds Social Security, Medicare, and other social insurance programs from revenue generated by payroll and self-employment taxes.

Does Payroll Tax Pay For Social Security?

Yes. Social Security is paid for through Payroll taxes and self-employment taxes under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA).
Taxes are allocated to three trust funds: the Old-Age (retirement) and Survivors Insurance (OASI), the Disability Insurance (DI), and the Medicare Hospital Insurance (HI) Trust Funds.

Does Payroll Tax Affect Social Security?

Yes. Payroll Taxes affect Social Security on the long run.

In 2019, almost 90% of total Old-Age and Survivors Insurance and Disability Insurance income was financed through payroll taxes.

The massive rise in unemployment numbers due to COVID-19, along with the Payroll tax cuts will have a substantial impact on Social Security income. This will result in draining Social Security’s coffers quicker than projected. Researchers at the Penn Wharton Budget Model now project that Social Security reserves might be depleted 4 years earlier than anticipated – in 2032 (from the previous 2036)

Which Is An Example Of A Payroll Tax?

As an employer, you’ll have to manage two types of taxes. Taxes that comes out of your (business) pocket, and taxes that you collect from your employee and pay the government.

Federal Taxes That You Must Pay Out Of Pocket

  • Federal Insurance Contributions Act (FICA): Social Security and Medicare Tax: Social Security Tax is 12.4% (employer and employee share the cost equally –employer pays 6.2% and employee pays 6.2%). Medicare is 2.9% (employer and employee share the cost equally –employer pays 1.45% and employee pays 1.45%)
  • Federal Unemployment Tax Act (FUTA): The Tax rate is 6% on the first $7,000 earned by an employee. Earnings over $7,000 are not taxed. That said, most states provide a 5.4% credit, which means employers pay only 0.6% for each employee. Employees do not pay FUTA. The FUTA rate for California in 2020 is 0.6%.

California State Taxes That You Must Pay Out Of Pocket

  • Unemployment Insurance (UI): The UI program provides temporary payments to individuals who are unemployed through no fault of their own. Apart from FUTA tax, you also are liable to pay California UI Tax on behalf of your employees. New employers pay 3.4% per employee for up to three years on the first $7,000 earned by an employee..
  • Employment Training Tax (ETT): ETT provides funds to train employees in targeted industries to improve the competitiveness of California businesses. Employers are liable to pay 0.1% on the first $7,000 in wages paid to each employee in a calendar year. The maximum tax is $7 per employee per year ($7,000 x .001).

2020 Federal and State Payroll Taxes

Federal Taxes

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California State Taxes

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Source: The Employment Development Department (EDD), State of California

Outsource Your Payroll Tax

Payroll Taxes can be confusing and complicated. Payments are due quarterly. Miss a tax deadline, and you could face a penalty between 2% and 15%. Save the hassle of doing it yourself. Save money by outsourcing your Payroll. It’s cheaper than hiring a fulltime employee.

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