Payroll Services

Payroll tax basics for employers & employees

After looking at your paycheck, ever wondered what are all taxes being withheld and whom are we paying all these taxes?
As a new business owner, have you ever wondered how payroll taxes are calculated and whom you need to pay taxes?

So, below is some information about payroll taxes which you may find it useful.

What are payroll taxes?

Payroll taxes comprise of social security and Medicare taxes. Medicare taxes fund medical benefits for people above the age of 65. Social security taxes benefit retirees, dependents, disable and their dependents. These taxes are commonly called as FICA – Federal insurance contributions act tax.

Half of the FICA taxes are deducted from wages. The other half employer must contribute.

Self-employed individuals also have to pay taxes in the form of self-employment taxes

Unemployment tax basics

There are few other types of taxes that you must be aware of. One of them is the unemployment tax. As an employer, you need to pay federal unemployment tax(FUTA tax) and state unemployment tax SUTA tax or state unemployment insurance.


What are self-employed taxes?

Self-employment tax rate

Self-employed individuals are required to pay self-employment tax instead of FICA tax. The self-employed tax rate is 15.3% on the first $127,200. 12.4% of this would be paid towards social security tax, 2.9% towards the Medicare tax. For wages or salaries earned that is greater than $127,200 only Medicare tax would apply.

Similar to employment tax, self-employed income is subject to additional Medicare tax if the wages are greater than $250,000 if married filing jointly, $125,000 if you are married filing separate, or $200,000 for everyone else.

Payroll Taxes-understanding your paycheck.

Understanding your take-home pay

Payroll tax rates

As mentioned earlier in our post, employees and employers both contribute equally towards the FICA payroll taxes. Self -employed individuals have a different tax rate.

Social Security and Medicare tax rates

Social security tax is a flat rate of 12.4% and can be applied to the first $127,200 that an employee is paid in 2017.

As you and your employee both contribute equally 6.2% is paid as an employee contribution and also you will pay 6.2% as an employer.


Medicare tax

Medicare tax is calculated at a rate of 2.9%. Again, the employee and employer contribution both would be the equal contribution of 1.45% each. An employee owes additional Medicare tax of 0.9% of the wages or salary is greater than $250,000 if married filing jointly and $125,000 if married filing separately or $200,000 for everyone else. There is no threshold set for wages subject to Medicare tax similar to social security taxes.


Here are few most commonly used IRS forms that you need to be familiar with.

Form W-4–As a new employee, you will be asked to complete the W4 form. Filling out W-4 forms helps the employer to calculate the right amount of federal and state income taxes to withhold. In order to complete the W4 form, you are required to determine the total number of withholding allowances to claim which in turn would help determine the total amount of federal and state taxes to be withheld from each paycheck. IRS website provides the below link relating to the withholding calculator.

Form W-2–A W2 form provides the total gross salary or wages that were paid to the employee including tax withheld, 401k employer contributions, Health savings account contributions etc. Employees usually must verify when they receive the W2 form to ensure the gross income is accurate along with their other employee contributions.

Form 1099– 1099 is a miscellaneous form that you may receive 1099 relating to any interest, dividends or capital gain distributions. Forms are sent by January 31st to all the recipients including any contractor payments.