What is Payroll Tax Rates | Meaning & Definition

What is Payroll Tax?

Payroll taxes are taxes collected by federal, state, and local governments. It is called a payroll tax because it is usually funded through employer payments and wage deductions.

What are Payroll Tax Rates for Employees?

Payroll taxes are deducted from an employee's salary to cover payroll costs. These include federal and state income taxes, Medicare, and Social Security tax.

What are Payroll Tax Rates for Employers?

Payroll taxes for employers are made up of State unemployment tax, Federal unemployment tax, Medicare, and Social Security tax.

Payroll Tax Rates

The typical federal payroll tax rate is 15.3 percent, with each employee and the employer each paying 7.65 percent.

FICA taxes means Medicare taxes and Social Security together. Social Security was introduced in the 1930s by The Federal Insurance Contributions Act.

Since it was the Federal Unemployment Tax Act of 1939 that first established this benefit, the tax on unemployment is commonly referred to as the FUTA tax

The tax rates have increased throughout the years. But since 1992 the rates remained the same. Rates for Federal payroll tax in 2022 are:

Social Security tax rate: 6.2%
Unemployment tax rate: 6%
Medicare tax rate: 1.45%
Additional Medicare tax rate: 0.9%
FUTA tax rate: 6% for the employer on the first $7,000 paid to the employee

In 2022, employers and workers will pay 7.65% in FICA taxes for a total of 15.3%. The state unemployment tax rates usually change based on how many claims an employer has made in the past.

So, a business with many former workers who have filed for unemployment will likely have a higher rate than one with none. As a result, different places have different rates for local payroll taxes.

Difference Between Income Tax and Payroll Tax

In the United States, "income tax" is the collective term for federal, state, and local taxes. Often it is confused with payroll taxes.

The most significant difference between these two taxes is the rate of collection. Payroll taxes, like those for Medicare, Social Security, etc., are collected at a uniform rate and sent immediately to the designated fund. On the other hand, the U.S. Treasury Department collects income taxes at progressive rates that change based on an individual's level of income. These funds may then be allocated to support a wide range of government programs.

Then, there is the upper limit. Certain payroll taxes have an annual wage base limit beyond which no more deductions would be made from the employee's earnings. There is no upper limit on income taxes.