Understanding the Current Rates of Payroll Tax
Payroll tax is a tax that is levied on wages and salaries that employers pay to their employees. It is essentially a tax on employment income that is used to fund various programs that are aimed at providing social security benefits, healthcare, and retirement benefits. Many businesses and individuals are not quite clear on what payroll taxes are or how they work. In this article, we will discuss the current rates of payroll tax in the United States, how these rates have changed over time, and the impact they have on businesses and individuals.
What is Payroll Tax?
Before we dive into the current rates of payroll tax, let us first define what payroll tax is. Simply put, payroll tax is a tax that is paid by employers and employees on employment income. The tax is usually calculated as a percentage of the employee’s wages or salaries, and is used to fund various government programs such as social security, Medicare, and unemployment insurance.
Payroll taxes are usually split into two parts:
Employee Payroll Tax: This is the amount that employees pay towards their payroll tax. It is usually deducted from their paychecks before they receive their wages or salaries.
Employer Payroll Tax: This is the amount that employers pay towards their payroll tax. It is usually calculated as a percentage of the employee’s wages or salaries, and is separate from the wages and salaries they pay their employees.
Current Rates of Payroll Tax
The current rates of payroll tax in the United States are as follows:
Social Security Tax: Social Security tax is usually calculated at a rate of 6.2% of an employee’s wages or salaries, up to a certain limit. The limit changes each year, and for the year 2021, the limit is $142,800. This means that any amount that an employee earns above this limit will not be subject to social security tax.
Medicare Tax: Medicare tax is usually calculated at a rate of 1.45% of an employee’s wages or salaries, with no limit. This means that all the wages and salaries that an employee earns will be subject to Medicare tax.
Additional Medicare Tax: Additional Medicare tax is usually calculated at a rate of 0.9%, and applies to employees whose wages or salaries exceed a certain threshold. The threshold changes each year, and for the year 2021, it is $200,000 for individuals and $250,000 for married couples filing jointly.
Self-Employment Tax: Self-employed individuals are also required to pay payroll tax, and the current rate is 15.3%. This rate is calculated as both the social security tax and the Medicare tax, but since the self-employed individuals are both the employer and employee, they are required to pay both portions.
Changes to Payroll Tax Rates
Payroll tax rates have changed over time, and the changes have usually been made to help finance various government programs or address budget deficits. Some of the major changes to payroll tax rates in recent years include the following:
Social Security Tax: The social security tax rate has remained constant at 6.2% for employees and 6.2% for employers since 1990. However, the limit on social security tax has increased significantly from $51,300 in 1990 to $142,800 in 2021.
Medicare Tax: The Medicare tax rate has also remained constant at 1.45% for employees and 1.45% for employers since 1990. However, an additional Medicare tax of 0.9% was introduced in 2013 for employees whose wages or salaries exceed a certain threshold.
Self-Employment Tax: The self-employment tax rate has increased significantly over the years. In 1990, the rate was 14.45%, but it has increased to 15.3% in 2021.
Impact of Payroll Tax on Businesses
Payroll tax has a significant impact on businesses, particularly small businesses. This is because businesses are required to match the social security and Medicare taxes paid by their employees, which can be a significant financial burden. The impact of payroll tax on businesses can be classified as follows:
Cost of Labor: Payroll tax increases the cost of labor for businesses since it is an additional expense that must be factored into the cost of employing workers. This can lead to reduced profit margins for businesses, which can make it difficult for them to expand or hire more workers.
Compliance Costs: Businesses are also required to keep accurate records and file payroll tax returns with the government. This can be time-consuming and requires additional resources, which can be a burden for small businesses with limited resources.
Impact on Employee Compensation: Payroll tax can also impact employee compensation, as businesses may be forced to reduce employee wages and salaries to offset the cost of payroll tax.
Impact of Payroll Tax on Individuals
Payroll tax also has a significant impact on individuals, particularly low-income earners. This is because payroll tax is a regressive tax, which means that it takes a larger percentage of income from low-income earners than from high-income earners. The impact of payroll tax on individuals can be classified as follows:
Reduced Take-Home Pay: Payroll tax reduces the take-home pay of employees since it is deducted from their paychecks before they receive their wages or salaries.
Redistribution of Income: Payroll tax is used to fund various social welfare programs, which can redistribute income from high-income earners to low-income earners.
Retirement Benefits: Payroll tax is used to fund social security, which provides retirement benefits to eligible individuals. This can be a significant source of income for low-income earners in retirement.
Conclusion
Payroll tax is a significant expense for businesses and individuals and has a significant impact on the economy. Understanding the current rates of payroll tax is important to businesses and individuals, as it helps them plan and budget for their expenses. It is important to note that payroll tax rates can change over time, and businesses and individuals should stay up-to-date with any changes. The impact of payroll tax on businesses and individuals should also be considered when discussing its role in the economy.
Currently, there are set to be increased employee contributions according to the federal payroll tax table. However, those increases will likely effect those with higher salaries at a greater percentage then those that are lower and middle class. A portion of FICA rates has a maximum threshold, while another portion is a percentage of an individuals salary that has no limit.
The tax reform movement has sought to distribute taxes in a more fair manner. While they have proposed the value added tax and other taxes that would distribute the tax burden more evenly, every type of tax has the potential to be distributed unevenly among taxpayers. Â Due to the nature of paying a flat percentage of salary toward taxes, many taxpayers with lower salaries pay a higher percentage of their salary towards taxes.
Currently, most tax payers pay more in payroll taxes then they do income taxes. Social Security is taxed at an average of around six percent of an employee’s income. Â Medicare is taxed at an average of one and one half percent with no payroll maximum deduction. Employers are also responsible for payroll tax rates of approximately the same rates as employees on a per employee basis.
