No matter what type of work you do in the US, you’ll likely be paying federal and local taxes including FICA payroll taxes and your income tax. If you’re employed you’ll usually simply see these withholdings show up on your paystub – but self employed people and business owners may have to follow a more complex reporting and payment process.
This guide covers payroll tax specifically, including what it is, what it pays for, and the US payroll tax deferral running throughout 2021.
What is payroll tax?
Payroll tax is paid to the federal or in some places, state governments, to fund specific programs. Payroll taxes in the US are withheld by your employer and paid to the relevant authorities. If you’re self employed you’ll need to pay these taxes directly.
The payroll taxes which apply all over the US are used by the federal government to pay for medicare and social security programs. You can see these payments on your pay stub, marked as MedFICA and FICA (FICA stands for the Federal Insurance Contributions Act). Some states and local governments also use payroll taxes to fund some programs such as infrastructure projects and park maintenance.
How much is payroll tax?
Federal payroll tax is currently set as follows:
- Social security payroll tax – 6.2% paid on salary up to USD142,800 per annum in 2021
- Medicare payroll tax – 1.45% paid on salary up to USD200,000, 0.9% paid thereafter
Social security payroll tax is subject to an annual cap. That means that you’ll only pay this tax on your earnings up to the cap, and any money you make in addition is not subject to the tax. Medicare payroll tax works a little differently, with a set amount of 1.45% to be paid on the first USD200,000 earned, and an additional medicare tax of 0.9% on earnings above this amount.
Can you suspend payroll tax?
If you’re in the US you may have heard about the payroll tax suspension or holiday which was announced in August 2020 as a response to the economic issues created by the global pandemic.
On August 8th 2020, President Trump announced that federal payroll taxes would be deferred for most employees earning under about USD100,000 a year, until the end of the year. These deferred taxes would then be collected later, during the first few months of 2021.
A further announcement in December 2020 extended the period of deferral throughout 2021, with repayments due from January 2022. At the time of writing the situation may still change, with analysts divided about how long the deferral will last, and even whether the repayments will ever be required.
What does payroll tax cut mean?
The payroll tax cut announced by President Trump in 2020 was set up as a deferral of applicable taxes. That means that employers could choose not to withhold these taxes during the period of the tax cut – but it doesn’t mean that these taxes are forgiven. They’ll still need to be repaid eventually unless further legislation is used to cancel unpaid tax debts down the line.
In effect, this could mean that employees have more in their paychecks now, but less once the deferral period ends. At this stage, employers will be responsible for collecting any deferred taxes which would mean higher withholding rates, and lower paychecks for employees.
It’s worth stressing that the situation is ongoing at the time of writing, and further announcements about the scheme’s application are likely. Talk to your employer if you have questions, and keep an eye out for further information in the media and on the IRS website.
When does the payroll tax cut start?
The payroll tax cut started on 1st September for applicable wages. However, not every employee will be eligible for this payroll tax. People earning over about USD100,000 a year are not affected, and the scheme relies on employers to participate and administer it.
Payroll tax calculator
If you want to work out your overall tax withholding you’ll be able to use calculator tools online to suit your situation. There are a number of commercial paycheck calculator tools available for free, which are designed to suit people in different employment situations – a quick Google search will give you a selection you can review to find the right one for you.
You can also use the IRS tax withholding estimator tool online to check your income tax withholding. However, this calculator doesn’t include MedFICA and FICA payments.
Payroll tax vs income tax
Both payroll and income tax are deducted from your salary at source. That means these amounts are withheld by your employer and remitted to the federal or state government. However, the ways that payroll and income taxes are applied and used are different.
Payroll taxes are used for specific government schemes, and the amount you pay may be subject to an annual cap. Your payroll tax in the US will go towards medicare and social security programs, and will be marked on your pay stub.
Income tax is progressive, which means it’s calculated according to your annual salary and not subject to a cap. Income tax revenue goes to the general funds of the government.
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Now you know all there is to know about payroll taxes in the US. If you’re impacted by the current payroll tax deferral, it’s worth keeping watch for further announcements so you understand what to expect, and when payments may be resumed.