Payroll Tax: The Ultimate Guide to Payroll Tax for 2023
February 27, 2023
If you’re an employee, you know that payroll tax makes a regular appearance on your paycheck in the form of deductions from your gross pay.
The question is, what percentage of your salary or wage consists of payroll tax deductions? How are these taxes withheld, and what are they for?
Don’t worry—this article will give you all the answers you need and help you understand the purpose and importance of payroll taxes.
Key Takeaways
- Payroll tax refers to Social Security, Medicare, and FICA taxes levied on employee salaries and wages.
- Tax amounts are portions of employee earnings that are deemed taxable. Therates are based on each employee’s filing status and their corresponding tax bracket.
- Self-employment taxes are Social Security and Medicare taxes imposed on self-employed workers.
- Unemployment taxes are imposed to help fund the government’s unemployment programs.
- Income taxes are paid by employees to fund local programs and services in their area, while both employers and employees pay payroll taxes.
What is Payroll Tax?
Payroll taxes are taxes paid on employee wages or salaries every pay period. They make up a percentage of employee earnings, which employers automatically deduct and remit to the IRS.
These taxes are necessary to finance the government’s social insurance programs, such as Social Security and Medicare. Other types of payroll tax payments withheld from employee earnings are federal, state, and local income taxes, and federal and state unemployment taxes.
Employees must fill out their Form W-4 as this will help their employers determine just how much should be deducted from their earnings for federal income taxes. For state income taxes, employees may be required to fill out a different withholding certificate. The tax rates depend on the regulations imposed on the state where their work is located.
What are Tax Amounts?
Tax amounts, or taxable amounts, are percentages of employee earnings that are considered taxable. They must be reported on employee tax returns.
Now, you might be wondering how your employer determines the taxable amount on your income. The IRS provides tax brackets to execute the progressive tax system set by the federal government.
Tax brackets are based on your filing status. The percentages are influenced by certain adjustments due to inflation or price increases in the market.
The tax brackets for the 2023 tax year have expanded limits by up to 7%. It is important to note that the seven tax brackets for federal income from the 2022 tax year will still apply to the 2023 tax brackets.
Here are the 2023 tax brackets for Single Filers, Married Filing Separately, Heads of Household, and Married Filing Jointly:
Single Filer Tax Brackets
Taxable income range | Tax due |
|---|---|
Not exceeding $11,000 | 10% of taxable income |
More than $11,000 but does not exceed $44,725 | $1,100 including 12% of the amount exceeding $11,000 |
More than $44,725 but does not exceed $95,375 | $5,147 including 22% of the amount exceeding $44,725 |
More than $95,375 but does not exceed $182,100 | $16,290 including 24% of the amount exceeding $95,375 |
More than $182,100 but does not exceed $231,250 | $37,104 including 32% of the amount exceeding $182,100 |
More than $231,250 but does not exceed $578,125 | $52,832 including 35% of the amount exceeding $231,250 |
Exceeds $578,125 | $174,238.25 including 37% of the amount exceeding $578,125 |
Married Filing Separately Tax Brackets
Taxable income range | Tax due |
|---|---|
Not exceeding $11,000 | 10% of taxable income |
More than $11,000 but does not exceed $44,725 | $1,100 including 12% of the amount exceeding $11,000 |
More than $44,725 but does not exceed $95,375 | $5,147 including 22% of the amount exceeding $44,725 |
More than $95,375 but does not exceed $182,100 | $16,290 including 24% of the amount exceeding $95,375 |
More than $182,100 but does not exceed $231,250 | $37,104 including 32% of the amount exceeding $182,100 |
More than $231,250 but does not exceed $346,875 | $52,832 including 35% of the amount exceeding $231,250 |
Exceeds $346,875 | $93,300.75 including 37% of the amount exceeding $346,875 |
Head of Household
Taxable Earnings | Tax Rate |
|---|---|
Not more than $15,700 | 10% of taxable earnings |
Over $15,700 but less than $59,850 | $1,570 plus 12% of the earnings worth more than $15,700 |
Over $59,850 but less than $95,350 | $6,868 plus 22% of the earnings worth more than $59,850 |
Over $95,350 but less than $182,100 | $14,678 plus 24% of the earnings worth more than $95,350 |
Over $182,100but less than $231,250 | $35,498 plus 32% of the earnings worth more than $182,100 |
Over $231,250 but less than $578,100 | $51,226 plus35% of the earnings worth more than $231,250 |
More than $578,100 | $172,623.50 plus 37% of the earnings worth more than $578,100 |
Married Filing Jointly Tax Brackets
Taxable income range | Tax due |
|---|---|
Not more than $22,000 | 10% of taxable earnings |
Over $22,000 but less than $89,450 | $2,200 plus 12% of the earnings worth more than $22,000 |
Over $89,450 but less than $190,750 | $10,294 plus 22% of the earnings worth more than $89,450 |
Over $190,750 but less than $364,200 | $32,580 plus 24% of the earnings worth more than $190,750 |
Over $364,200 but less than $462,500 | $74,208 plus 32% of the earnings worth more than $364,200 |
Over $462,500 but less than $693,750 | $105,664plus 35% of the earnings worth more than $462,500 |
More than $693,750 | $186,601.50 plus 37% of the earnings worth more than $693,750 |
Self-Employment and Unemployment Taxes
Self-employment taxes are composed of Medicare and Social Security taxes imposed on taxpayers who generate income independently. The tax rates for self-employment tax are distinctly higher compared to those of employees—that’s 12.4% for Social Security and 29% for Medicare.
Self-employed individuals must file their taxes on their own through Schedule SE (Form 1040 or 1040-SR).
Unemployment taxes are payroll taxes levied by the federal government to help fund unemployment programs and benefits for employees who lost their jobs due to unforeseen circumstances.
Established through the passing of the Federal Unemployment Tax Act (FUTA) in 1939, unemployment tax rates are 6% of the initial $7,000 of each employee’s annual salary.
Difference Between Income Taxes and Payroll Taxes
Payroll taxes are paid by both employers and employees, whileincome taxes are commonly local income taxes levied on employees to help add resources for public utilities and services.
Here are a few more key differences between income and payroll taxes:
- Income tax rates range between 10% to 37%, while payroll tax rates are levied at 15.3%.
- Higher-income will yield higher local income taxes. Federal payroll taxes are split equally between employers and employees.
- Income taxes are imposed on employee wages and salaries, while payroll taxes are levied on both employers and their staff.
Types of Payroll Tax
There are three main types of payroll taxes: Social Security payroll tax, the Medicare payroll tax, and the FICA tax. In the following section, we’ll go over them in detail so you can get a better picture of these taxes.
Social Security Payroll Tax
Social Security payroll tax is levied on employee and employer payrolls and on the earnings of self-employed workers. It is meant to provide additional funding to the U.S. government’s Social Security program.
There are two trust funds that Social Security taxes help finance, and these are the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance Trust Fund. The former provides financial assistance for survivor and retirement benefits, while the latter aids in disability programs.
Medicare Payroll Tax
Similar to Social Security, the Medicare payroll tax is also imposed on self-employed individuals, employers, and employees. This time, this specific type of tax goes to Medicare benefits.
The two different trust funds included under the Medicare payroll tax are theHospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund.
The Hospital Insurance Trust Fund provides coverage for home and hospital care and skilled nursing inpatient care (Medicare Part A).
Meanwhile, the Supplementary Medical Insurance Trust Fund helps finance outpatient care, laboratory screenings and tests, x-rays, and ambulance service (Medicare Part B), along with prescription drugs (Medicare Part D).
FICA Tax
FICA tax (Federal Insurance Contributions Act) is enforced to help generate funding for Social Security and Medicare programs. It is typically withheld directly from employee salaries and wages.
This tax includes 6.2% of an employee’s gross wage for Social Security and 1.45% for Medicare. Contrastingly, self-employed workers pay their Social Security and Medicare taxes through SECA (the Self-Employment Contributions Act).
Final Thoughts
Payroll taxes are a constant part of both workers’ and employers’ earnings. Without payroll taxes, it would be challenging for the government to source funds that benefit society as a whole.
In that regard, make it a habit to stay up-to-date with any changes to your tax brackets and responsibilities. The key is to determine whether you are paying more or less than the imposed tax rates based on your income and filing status.
