Payroll Taxes

You've got a new job and they're offering you $1,000 a week to start!  That's good news, but even more important than how much money you're making each week is how much money is going to make it into your pocket.  That's because there is a little thing called payroll taxes that can take quite a bite out of our weekly paychecks.

Paying Payroll Taxes

As the saying goes, taxes are one of those guarantees in life.  You're protected by police, you're schooled, and you're paying politicians to make decisions for you.  You get the point.  Whether we're talking about a local municipality or the federal government, we are talking big business.  The government is the largest employer in the United States and those folks deserved to get paid just like you - and most of that money comes from your paycheck.

Besides employing a lot of people to administer and provide us with essential services, the government also supplies us with some pretty important medical and retirement benefits.  With all that as a background, let's take a closer look at the types of payroll taxes we pay.

Types of Payroll Taxes

Withholding of payroll taxes is normally the responsibility of your employer.  If you're self-employed, then you need to tend to this matter yourself.  In the United States, employers are responsible for withholding federal income taxes, Social Security and Medicare taxes.  In many states, your employer may also be responsible for withholding a state income tax or even a municipal income tax.

Federal Income Taxes

Federal income taxes are used to support the activities of the federal government.  Some of the larger expenditures of the federal government include the military, energy exploration, education, science, and human services.

Generally, the amount of tax you pay increases as your gross income increases.  That is a general rule, because you pay taxes based on your adjusted gross income, which accounts for all other sources of income as well as tax deductions.  When you're all done making your income adjustments, you use tax tables or a table of tax brackets to calculate your actual federal income tax liability, which is then compared to the taxes withheld from your paycheck over the last year.

FICA - Federal Insurance Contributions Act

Under the Federal Insurance Contributions Act, or FICA, approximately 15.3% of your earned income is must be paid into the two components of FICA - Social Security and Medicare.  If you're a salaried employee, then your employer is responsible for paying half of all the FICA taxes due.  For most of us, that means we're paying around 7.65% into these two programs.

Social Security

We usually think of Social Security as a source of retirement income.  But it also provides income to the disabled, health care insurance for the aged and unemployment compensation.  There is a limit on how much Social Security tax you pay each year.  For example, in 2008, the limit is $6,324 and that is based on a 6.2% tax on the $102,000 income limit.

Medicare

Medicare is simply a health insurance program for individuals age 65 and older and others with certain disabilities.  Unlike Social Security, there is no income limit on Medicare payroll taxes.  For most of us that means exactly 1.45% of our gross income goes into the Medicare fund to pay for these important services.

State Income Taxes

If you live in the states of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, then you don't even need to worry about state income taxes because you've got none.  For the rest of us, there is a complex set of tax brackets and income tax rates that apply to each state.

As is the case with federal income taxes, you pay state income taxes after taking credit for deductions or exclusions.  For a brief overview you can take a look at our publication on State Income Taxes.

Municipal Taxes

In general, most of the larger cities across the United States charge a municipal income tax or city tax.  The rates of certain cities can be quite high.  For example New York City charges a payroll tax in the area of 3%.  Unlike federal and state taxes, you are usually charged municipal income taxes based on where you work and not where you live.

For example, if you live in New Jersey and work in New York City, then you pay federal income taxes, New Jersey state income taxes, and city taxes are owed to the New York City.

Payroll Tax Calculators

Finally, if you are looking to get a rough idea of the amount of payroll tax that might apply to your situation, there are a number of payroll tax calculators you can use.  Some of the better calculators we've found include:

• IRA Withholding Calculator - Right from the ultimate authority on payroll taxes, if you're afraid that your federal income tax withholding amount is not correct, this calculator can help.
• PayrollTaxes.Com - The calculator you'll find here provides you an estimate on both your state and federal income taxes.

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