Payroll tax is a portion of your earnings that is automatically deducted from your paycheck before you receive it. This tax is used to fund various government programs, including Social Security, Medicare, and unemployment insurance. The amount of payroll tax you pay depends on your income and filing status. The two main types of payroll taxes are the Social Security tax and the Medicare tax. The Social Security tax is used to fund Social Security benefits, which provide income to retired workers, survivors, and people with disabilities. The Medicare tax is used to fund Medicare benefits, which provide health insurance to people over 65 and people with certain disabilities.
Federal Income Tax
Federal income tax is a tax levied on personal income by the United States government. It is one of three major types of payroll taxes, along with Social Security tax and Medicare tax.
The amount of federal income tax you pay depends on your taxable income, which is your total income minus certain deductions and exemptions.
- Taxable income is divided into seven tax brackets:
- 10%
- 12%
- 22%
- 24%
- 32%
- 35%
- 37%
The tax rate for each bracket increases as your taxable income increases.
In addition to the standard deduction, you may also be able to claim additional deductions and exemptions that will reduce your taxable income. Some common deductions and exemptions include:
- Itemized deductions, such as mortgage interest, charitable contributions, and state and local taxes
- Personal exemptions, for yourself, your spouse, and your dependents
Once you have calculated your taxable income, you can use the tax table to determine how much federal income tax you owe.
| Taxable Income | Tax Rate | Tax Amount |
|---|---|---|
| $0 – $10,000 | 10% | $0 – $1,000 |
| $10,001 – $40,000 | 12% | $1,001 – $4,800 |
| $40,001 – $85,000 | 22% | $4,801 – $18,700 |
| $85,001 – $160,000 | 24% | $18,701 – $38,400 |
| $160,001 – $205,000 | 32% | $38,401 – $58,000 |
| $205,001 – $539,900 | 35% | $58,001 – $188,950 |
| $539,901+ | 37% | $188,951+ |
State Income Tax
State income tax is a tax imposed by a state on the income of its residents. The amount of state income tax you owe depends on your taxable income, which is your total income minus certain deductions and exemptions. The state income tax rate varies from state to state, ranging from 0% to 13.3%. The following table shows the state income tax rates for all 50 states.
| State | Income Tax Rate |
|---|---|
| Alabama | 0% |
| Alaska | 0% |
| Arizona | 2.59% |
In addition to state income tax, you may also be required to pay local income taxes. Local income taxes are imposed by cities or counties, and the rates vary depending on the location. The following table shows the local income tax rates for some of the largest cities in the United States.
| City | Local Income Tax Rate |
|---|---|
| New York City | 3.876% |
| Los Angeles | 1.0% |
| Chicago | 2.7% |
Social Security Tax
Social Security tax is a payroll tax that funds the Social Security program, which provides retirement, disability, and survivor benefits to eligible individuals and their families.
- The Social Security tax rate is 6.2% for both employees and employers.
- The tax is withheld from employees’ paychecks and matched by employers.
- The combined employee and employer contributions are deposited into the Social Security Trust Fund.
The amount of Social Security tax withheld from an employee’s paycheck depends on the employee’s income and the Social Security wage base limit, which is the maximum amount of earnings subject to Social Security tax each year. For 2022, the Social Security wage base limit is $147,000.
| Income | Social Security Tax Withheld |
|---|---|
| $50,000 | $3,100 |
| $75,000 | $4,650 |
| $100,000 | $6,200 |
| $147,000 | $9,114 |
Employees who earn more than the Social Security wage base limit do not pay Social Security tax on the portion of their income that exceeds the limit.
Medicare Tax
Medicare tax is a federal payroll tax that funds the Medicare program, which provides health insurance to people aged 65 and older, as well as to certain younger people with disabilities.
Medicare tax is calculated at a rate of 1.45% of gross wages. This means that for every $100 you earn, $1.45 will be withheld for Medicare taxes.
Medicare tax is withheld from both employees’ and employers’ paychecks. Employees pay 1.45% of their gross wages, while employers pay an additional 1.45%.
| Taxpayer | Medicare Tax Rate |
|---|---|
| Employee | 1.45% |
| Employer | 1.45% |
Medicare tax is a mandatory tax, which means that all employees and employers are required to pay it. There are no exceptions to the Medicare tax.
Well, there you have it, folks! Now you know exactly what part of your paycheck is going towards payroll taxes. It may not be the most exciting thing to think about, but it’s pretty important stuff. After all, you want to make sure your taxes are being paid so you can avoid any nasty surprises come tax time. Thanks for sticking with me through this little journey into the world of payroll. If you have any more questions, be sure to check out our website again soon. We’ve got plenty of other helpful articles that can help you make sense of your finances.