What is the Difference Between Employer and Employee Taxes?
With the introduction of California’s AB-5 law, businesses that used to rely heavily on independent contractors as their main work-force have had to make a huge transition in running payroll taxes. For most of us, this is a new thing. So let’s take a few minutes to breakdown how payroll taxes work. Who pays what? What are the percentages? Why, God, Why?! And so on.
What are Payroll Taxes?
Payroll taxes are taxes paid on wages or salaries that employees have earned, some are paid by both employers and employees. Both employers and employees pay FICA tax (Social Security Tax and Medicare Tax) and any other local taxes based on the city, county or municipality that you work in. The employer, alone, is responsible to pay Federal Unemployment Taxes and State Unemployment Taxes. While the employee, alone, pays Federal Income Tax and State Income Tax. The Employer is responsible for withholding the employee’s taxes (Federal Income tax, State income tax, Social Security Tax, Medicare tax, and any local taxes).
Breakdown of FICA
FICA Tax (or Federal Insurance Contributions Act) is the federal taxes taken out of workers’ paychecks to pay older Americans their Social Security retirement and Medicare benefits. This is a 50-50 split.
The Social Security Tax is 12.4% (or 6.2% for the employer to pay and 6.2% for the employee to pay). This rate is applied to the first $132,900 that the employee earns. Once the employee hits that amount in a year, there won’t be any more Social Security taxes withheld beyond that limit.
The Medicare Tax is 2.9% (or 1.45% for the employer to pay and 1.45% for the employee to pay) per dollar earned of the employee’s gross wages until the employee earns beyond $200,000, then the rate changes to 0.9% for the additional Medicare tax.
Breakdown of Employer Portion of Payroll Taxes
The Federal Unemployment Tax Act (or FUTA) goes toward helping those who have recently lost a job. This is a 6% tax of all taxable wages up to the first $7,000 earned income per employee.
In states that have an outstanding balance of advances under Title XII of the Social Security Act at the beginning of January 1 of two or more consecutive years are subject to a reduction of credits otherwise available against the FUTA tax.
In these states, an employer who pays their payroll taxes on time can receive up to a 5.4% credit. It would seem that this list changes regularly. Tax agencies should have all of the up to date information for your state.
The State Unemployment Insurance Tax (SUI) is paid by employers as a safety net for the unemployed. Most states have different rates, so check your state government’s website or get in contact with a local tax professional. In 2020 California employer SUI tax rates continue to range from 1.5% to 6.2% on Schedule F+. The new employer SUI tax rate remains at 3.4% for 2020.
Breakdown of Employee Portion of Payroll Taxes
Federal Income Tax (10%-37%) is paid by employees and is based on their gross pay, personal exemptions and filing status (single, married, etc).
State Income Tax is paid by employees and varies from state to state and also from year to year. Here is a list of the 2020 state income tax rates. The numbers vary from 0% to nearly 13%.
The employer is responsible for the income tax withholding on their employees' behalf per pay period.
Tax laws change over time and can vary based on location and industry. Keep up to date and compliant by using a payroll company such as Topsheet. We keep track of all of this, so you don’t have to. To get an instant estimate for your production payroll, check out our payroll calculator.