Most individuals are breathing a sigh of relief in response to the passing of tax season. But for employers and HR professionals, the coming and going of April 15 means nothing as far as payroll taxes are concerned.
The federal government levies payroll taxes on employee wages and self-employment income, primarily for the purpose of funding social insurance benefits such as Social Security and Medicare. Federal taxes withheld from paychecks go towards defense, security and other national interests. State income taxes, in the states that have them, are used to fund a variety of areas, including education, healthcare, transportation, corrections, state police and parks and recreation.
Over the years, payroll taxes have become an increasingly essential component of the federal budget. Federal payroll taxes alone generated $1.16 trillion in fiscal year 2017, accounting for 35% of all federal tax revenues and equaling 6% of the nation's gross domestic product, according to the Center on Budget and Policy Priorities.
This quick guide will tell you everything you need to know about federal payroll taxes in 2019, including changes made to the maximum threshold for this year.
Calculating and paying 2019 federal payroll taxes
The two primary payroll taxes, Social Security and Medicare taxes, are collected together as the Federal Insurance Contributions Act tax. The FICA tax rates are statutorily set, and can only be altered by new tax legislation.
Social Security is funded through a 12.4% payroll tax on wages up to the taxable earnings cap, half of which, or 6.2%, is paid by workers, and half of which is paid by employers. Individuals who are self-employed are required to pay the entire 12.4%.
This wage cap is annually adjusted to account for the increase in average salaries. For 2019, the wage cap has been raised to $132,900, an increase of $4,500 over the 2018 level. That means all employees should have 6.2% of their wages up to $132,900 withheld to fund Social Security, and employers must match the amount to account for the other half of the 12.4% tax.
The Medicare tax is levied at a rate of 2.9% of wages, which is also split evenly between employees and employers at 1.45% each. Unlike the Social Security tax, there is no wage cap, though individuals making above a certain threshold are required to pay more. Married filers' earnings over $250,000 and single filers' earnings over $200,000 are taxed at an additional 0.9%, for a total of 3.8%. This increases the wage earner's Medicare tax rate to 2.35%, as the employer-paid portion of the Medicare tax remains at 1.45%.
A third yet far less significant federal payroll tax is the Federal Unemployment Tax Act tax, which requires employers to pay an effective rate of 0.6% on the first $7,000 of a worker's wages, up to $42 per worker per year. The revenues are used to fund the administration of state unemployment insurance programs, which each state further finances by collecting its own unemployment payroll tax. These state unemployment payroll taxes have rates that vary depending on the state.
For business owners, and organizations across the nation, choosing a professional payroll company to file state and federal employee taxes as well as social security is key to relieving them from potential fines or not filing accurately. Research Triton Benefits & HR Solutions for your payroll and HR needs.