Payroll taxes are taxes assessed solely on the amount of wages paid or received, with no adjustments or deductions allowed. Employers in the United States pay payroll taxes for Social Security, Medicare and unemployment insurance. Employees share the cost of the first two, but in most cases, only employers pay unemployment taxes.
Social Security Tax
Every employer must pay Social Security tax for every employee. The Social Security tax rate is 6.2 percent of each employee's wages. For example, if an employer paid a worker $45,000 in wages in a year, he would pay $2,790 in Social Security taxes for that employee. Employees usually pay an equal amount, which is withheld from their pay. In 2011, however, the employee portion temporarily dropped to 4.2 percent.
Social Security taxes apply only up to a maximum amount set by law. As of 2011, that limit was $106,800, so the maximum an employer would have to pay in Social Security taxes for a worker was $6,621.60.
Employers must also pay Medicare taxes for every employee. The Medicare tax rate is 1.4 percent of each employee's wages. So for a worker making $45,000 a year, the employer would pay $630. As with Social Security, employees pay an equal amount, which is withheld from their pay. Unlike Social Security taxes, though, Medicare taxes apply to an employee's entire income, with no upper limit. Whether a worker's salary is $15,000, $150,000 or $1.5 million, that worker pays Medicare tax on the whole thing.
Federal Unemployment Tax
Nearly all employers are required to pay federal unemployment tax. This is the tax that pays for unemployment benefits for laid off workers. Any employer that pays more than $1,500 in any quarter of a calendar year, or that has at least one employee on at least one day in 20 weeks out of the year, has to pay unemployment tax. As of early 2011, that tax was 6.2 percent of every employee's wages. The tax applied only to the first $7,000 of wages, so the most an employer would have to pay is $434 per employee. Employees do not pay federal unemployment tax.
State Unemployment Tax
Unemployment benefits are distributed under a joint federal-state program, and every state assesses a separate unemployment tax on employers. Those tax rates vary widely, as do the amount of wages to which they are applied. However, employers are allowed to reduce their federal unemployment tax payments by the amount of their state payments, up to a maximum of 5.4 percent of a worker's covered wages. Some states, such as New Jersey, also require employees to pay state unemployment taxes.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.