Payroll taxes are mandatory contributions that both employees and employers make including federal, state and local income tax, Social Security tax, Medicare tax, and federal and state unemployment tax. The percentage of payroll taxes paid by an employer is a minimum of 9.25% depending on state unemployment rates, so it is important to include the employer’s taxes when calculating the “real” cost of an employee (and don’t forget about your worker’s compensation).
The employer pays 6.2% for Social Security; 1.45% for Medicare, .6% – 6% for federal unemployment and an additional percent for state unemployment (dependent on employer).
The employee also pays 6.2% for Social Security and 1.45% for Medicare. The employee does not pay toward unemployment but does have federal and state income taxes withheld. This amount varies by employee based on the W-4. While the state withholding procedures have remained unchanged (at least in WI), the new federal W-4 has been a source of stress for many employees.
Basically, the Feds look at each paycheck and assume that is how much you will make each pay all year and taxes accordingly. Therefore a check that includes a bonus may have substantially more federal income tax taken out and a check with only a few hours on it may have no federal income taxes withheld. To determine how best to complete your W-4 or to see if you are on target, the IRS has created a Tax Withholding Estimator Tax Withholding Estimator (irs.gov).
Sound confusing – it is!
Let us help clear things up for you and your employees (and keep you compliant)!