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Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' pay, also known as withholding, pay-as-you-earn (PAYE), or pay-as-you-go (PAYG) tax. The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.

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Payroll tax systems

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Australia

Canada

The Northwest Territories in Canada applies a payroll tax of 2% to all employees. It is an example of the second type of payroll tax, but unlike in other jurisdictions it is paid directly by employees rather than employers. Unlike the first type of payroll tax as it is applied in Canada, though, there is no basic personal exemption below which employees are not required to pay the tax.[1] Ontario applies a health premium tax to all payrolls on a sliding scale up to $900 per year.[2]

China

In China, the Payroll Tax is a specific tax which is paid to states and territories by employers, not by employees. The tax is not deducted from the worker's pay. The Chinese Government itself requires only one tax to be withheld from paychecks: the PAYG (or pay-as-you-go) tax, which includes medicare levies.

Croatia

In Croatia, the payroll tax is composed of several items:

  • national tax on personal income (Croatian: porez na dohodak), which is applied incrementally with rates of 0% (personal exemption), 15%, 25%, 35%, 45%
  • optional local surcharge on personal income (Croatian: prirez), which is applied by some cities and municipalities on the amount of national tax, currently up to 18% (in Zagreb)
  • pension insurance (Croatian: mirovinsko osiguranje), universal 20%, for some people divided into two different funds, one of which is government-management (15%) and the other is a selected pension fund (5%)
  • health and unemployment insurance (Croatian: zdravstveno osiguranje), divided into 15% for general health insurance, 0.5% for work-related accident insurance, and 1.7% for unemployment insurance

Bermuda

In Bermuda, payroll tax accounts for over a third of the annual national budget, making it the primary source of government revenue.[3] The tax is paid by employers based on the total remuneration (salary and benefits) paid to all employees, at a standard rate of 14% (though, under certain circumstances, can be as low as 4.75%). Employers are allowed to deduct a small percentage of an employee's pay (around 4%).[4] Another tax, social insurance, is withheld by the employer.

Brazil

In Brazil employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system. Depending on the company's main activity, the employer must also contribute to federally-funded insurance and educational programs. There is also a required deposit of 8% of the employee's wages into a bank account that can be withdrawn only when the employee is fired, or under certain other extraordinary circumstances (called a "Security Fund for Duration of Employment"). All these contributions amount to a total tax burden of almost 40% of the payroll for the employer and 15% of the employee's wages.

United Kingdom

In the United Kingdom, Income tax for employees and Employees' National Insurance contributions are examples of the first kind of payroll tax, while Employers' National Insurance contributions are an example of the second kind of payroll tax.

United States

In the United States, employers are required to withhold federal income tax, plus one-half of the Social Security tax, and one-half of the Medicare tax. Together, the employer's and employee's shares of the Social Security and Medicare taxes are known as the FICA tax. In some places, employers may be required to withhold state income tax, or even county or city income tax. In addition the employer is required to pay State and Federal unemployment tax.

The payor and payee should determine whether the payee providing services is an employee or, alternatively, an independent contractor. A payor generally is not required to withhold taxes on compensation paid to an independent contractor.[5]

Employers who do not pay withheld payroll taxes to the U.S. government for employees are assessed a Trust Fund Recovery Penalty by the IRS. The Trust Fund Recovery Penalty is assessed to individuals determined to be responsible by a 4180 Interview for the missing taxes and can be those who willfully do not collect, account for, or pay the taxes. These individuals can be business owners, officers, or employees.[6]The penalty is for 100% of taxes owed plus interest.

Social security and Medicare taxes

Social security and Medicare taxes, also known as FICA taxes, must be withheld from the employee's wages. The employer must also pay a matching amount of FICA taxes for employees.

Typical payroll codes on a pay slip

Code Description short Description long
CAS State Tax (CAS = California single)
CAM State Tax (CAM = California married)
CASUTA Unemployment (CA State Unemployment)
EMED Medicare (E is for employee)
CMED Medicare (C is for client – employer)
EFICA Social Sec. (E is for employee)
CFICA Social Sec. (C is for client – employer)
DISAB Disability (Voluntary disability)
CASDI Disability (State disability)
USS Fed Income Tax (USS = United States single)
USM Fed Income Tax (USM = United States married)

CASUTA , CATX, CMED, and CFICA are employer paid taxes.

1. Social Security Tax: For the year 2008, the employer must withhold 6.2% of an employee's wages and pay a matching amount in social security taxes until the employee reaches the wage base for the year. The combined total for the employee and the employer is equal to 12.4% of gross compensation. The wage base for social security tax in 2008 is $102,000. Once that amount is earned for a given year, neither the employee nor the employer owe any additional social security tax for that year.

The maximum amount subject to Social Security withholding is adjusted for changes in a national wage index annually (if there is a cost of living adjustment in Social Security benefits).

Year Amount
2001 80,400
2002 84,900
2003 87,000
2004 87,900
2005 90,000
2006 94,200
2007 97,500
2008 102,000
2009 106,800
2010 106,800

2. Medicare Tax: For the year 2008, the employer must withhold 1.45% of an employee's wages and must pay a matching amount for Medicare tax. The combined total for the employee and the employer is equal to 2.9% of gross compensation. Unlike the Social security tax, there is no maximum wage base for the Medicare portion of the FICA tax. Both the employer and the employee continue to incur and pay Medicare tax on each additional amount of gross compensation, with no limit on the amount of gross compensation on which the tax is imposed.

Unemployment taxes

Each employer also must pay State and Federal Unemployment Taxes (SUTA and FUTA). The FUTA rate is equal to 6.2% of gross compensation, but normally nets to 0.8% because the employer is allowed to take a credit of up to 5.4% of compensation for SUTA taxes paid by the employer. This will be the case if the employer is eligible for the maximum credit. The wage base for FUTA is $7,000 (i.e., the employer is liable for FUTA only on the first $7,000 of compensation paid to each employee per calendar year). Each state has a different rate, so that employers must consult the state requirements for each applicable state regarding tax rates and maximum wage base. Many states require new business to have an average starting rate until an employment history is created. For example, Indiana requires new employers to pay 2.7% for the first 3 years. Afterwards the rate is adjusted depending on various factors, such as whether an ex-employee files a request for unemployment benefits.

Historical Social Security, employee wage tax base

The following table only shows the taxes collected from the employee. The employer pays another 6.2 percent, so the total Consumer Price Index (CPI), which is a good monitor of inflation, of 2.8% over the same years.

Year Social Security Wage Base Social Security Tax Rate Maximum Annual Social Security Withholding
2010 $106,800 6.2% $6,621.60
2009 $106,800 6.2% $6,621.60
2008 $102,000 6.2% $6,324.00
2007 $97,500 6.2% $6,045.00
2006 $94,200 6.2% $5,840.40
2005 $90,000 6.2% $5,580.00
2004 $87,900 6.2% $5,449.80
2003 $87,000 6.2% $5,394.00
2002 $84,900 6.2% $5,263.80
2001 $80,400 6.2% $4,984.80
2000 $76,200 6.2% $4,724.40
1999 $72,600 6.2% $4,501.20
1998 $68,400 6.2% $4,240.80
1997 $65,400 6.2% $4,054.80
1996 $62,700 6.2% $3,887.40
1995 $61,200 6.2% $3,794.40
1994 $60,600 6.2% $3,757.20
1993 $57,600 6.2% $3,571.20
1992 $55,500 6.2% $3,441.00
1991 $53,400 6.2% $3,310.80

For information on Federal payroll tax requirements, see IRS publication 15, Circular E. For information on State payroll tax requirements, contact your state's taxation and revenue department.

References

External links


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