Check out our Employer’s Guide to payroll tax and deductions

9 of March, 2021

The world of tax and deductions can be scary at first. As an employer, you have to understand not only the usual such as income tax, but also how payroll tax works. In particular, you should know what deductions it includes, which part is withheld from your employees’ salary and which is paid by you. In this article, we explain what you need to know about payroll tax and deductions.

What are payroll tax and deductions?

Payroll tax is a tax that concerns both the employer and the employee. Indeed, the total amount of the tax is split between the employer and the employee. This means that part of it is deducted from the employee’s gross salary. The employer then pays to the Internal Revenue Service their share as well as the employee’s share. Employees know how much the employer has withheld from their salary by consulting their payslip. On it, they should be able to see their gross and net salaries, as well as the various taxes. This is why you should make sure to mention all the required and correct information when preparing a payslip.

The federal government uses payroll tax to fund its social insurance programs. Payroll tax differs in this from income tax, since the latter goes to the government’s general fund. Moreover, bear in mind that state governments can also establish a local tax that is included the payroll tax. That part of the payroll tax serves for the improvement of local infrastructures.

What are the required payroll deductions?

Federal Insurance Contribution Act

The Federal Insurance Contribution Act (FICA) forms the most important part of the payroll tax. It amounts to about 7.65% of an employee’s salary. The FICA funds two programs, to which bother the employer and the employee contribute: social security and medical insurance. On one hand, the amount that goes into social security serves two separate trust funds: the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI). On the other hand, the amount paid to the medical insurance goes to two other trust funds: the Hospital Insurance Trust Fund and Supplementary Medical Insurance Trust Fund.

Unemployment insurance

Unemployment insurance encompasses two programs that operate at different levels: the SUTA (State Unemployment Tax Act) and the FUTA (Federal Unemployment Tax Act). The SUTA provides displaced workers with unemployment benefits. In most states, only employers pay the SUTA. Its rate differs from one state to the other. The FUTA is a federal tax paid by the employer. It offers compensation to workers who have lost their job.

Retirement programs

Retirement programs vary between companies. Every business establishes its own retirement program through which employees give a part of their salary in order to create a pension pot. Since every company has its own program, the deduction rate is different for each company and for each employee.

Local taxes

As we said earlier, states and municipalities can add local withholding to the federal payroll tax. Employer and employee contribute to it. In the end, your payroll tax rate depends on your business’s location.

How do I calculate payroll tax deductions?

Calculating payroll tax deductions should be easier now that you know exactly what this tax entails. However, it can become even easier if use the right tools. Sesame’s HR suite enables you to access all the information regarding your employees’ payroll in one place. That way, you can check at a glance that all taxes have been correctly deducted and that the payslips contain no mistake.