What is Payroll Tax?

Tax Planning Woman looking at her payroll tax

If you’re an employee you’re probably used to getting a regular paycheck every week or twice a month, but you most likely don’t pay attention to what’s being deducted from your income unless you see a change or fluctuation in what you take home. Sometimes employees recognize a change at certain periods in the year and it could be attributed to the maximum threshold of payroll taxes being reached.

Like many, you may have a lot of questions about payroll taxes. TurboTax has you covered and is here to answer common questions we hear about payroll tax.

What is payroll tax?

Payroll tax consists of FICA (Federal Insurance Contribution Act) tax which is a tax imposed on employees and employers that helps fund Social Security and Medicare. If you are employed, these taxes are taken out of your paychecks, so most people don’t really notice them.

If you’re self-employed, you pay FICA taxes and they are calculated on your return as self-employment tax when you file.

How much is deducted from your paycheck for payroll tax?

As an employee, you pay FICA tax, which is 7.65% of your gross income. FICA tax consists of the Social Security and Medicare tax that is withheld from your paycheck. Social Security tax is imposed on your wages based on a wage-base limit, Medicare tax, however, doesn’t have a wage-base limit. 

Employees pay 6.2% Social Security tax on the first $137,700 of income and 1.45% Medicare tax from all earned income for 2020. Your employer also matches what you pay so the total that goes into Social Security and Medicare tax is 15.3%. The wage-based limit for Social Security is the reason why some employees may start to notice a difference in what they bring home in their paycheck since once they hit the wage-base threshold Social Security tax is no longer withheld.

If you’re self-employed, you pay the entire 15.3% as self-employment taxes when you file. The good news is that the IRS allows you to deduct half the self-employment tax against your income for federal income tax purposes and 15.3% is calculated only on your net business income, not on your gross income.

Does the payroll tax rate ever change?

Generally, the Social Security and Medicare tax rate portions of payroll taxes have remained the same, however, there have been some occasions when payroll tax relief or payroll tax cuts like the Economic Recovery Act were voted into law as a part of an economic stimulus.

Don’t worry about knowing these tax laws. TurboTax will ask simple questions about you and give you the deductions and credits you’re eligible for based on your answers.

If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with an average of 15 years experience to get your questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish, year-round and can also review, sign, and file your taxes from the comfort of your home.

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