Any employee who earns a paycheck will see a portion of that check go toward payroll taxes. That said, most people probably don’t know the specifics of what the money goes toward. In this article, we will go over what payroll taxes are, who pays payroll taxes, and other information that is pertinent both to employers and employees.
What Are Payroll Taxes?
Payroll taxes are used to fund social security programs, like Medicare and Social Security. They come from employees’ wages, salaries and tips. According to the U.S. Department of Treasury, 38.3% of federal tax revenue comprised payroll taxes in 2020.
Social Security taxes began in 1937, while Medicare taxes didn’t kick in until about 30 years later in 1966. Since then, rates have obviously increased, with Social Security taxes going up at a quicker pace than Medicare. Any employee who ever wondered why their take-home pay seemed so much smaller than their actual salary can look to payroll taxes as the culprit.
The W-4 Form
Any time an employee starts a new job, they will have to fill out a new W-4 Form. The W-4 informs the employer how much money from one’s paycheck should go to federal taxes.
W-4 Forms must include:
- Name and address
- Social Ssecurity number
- Whether the employee is married or single
Employees should re-fill out the form again if their marriage status ever changes or if they start an additional job.
Who Pays Payroll Taxes?
The marketplace actually decides tax incidence (the division of a tax burden between stakeholders), not the law. Instead of payroll tax being split between employers and employees, it’s the employees who pay the bulk of it. As mentioned above, the tax comes out of their paychecks.
What Should Employees Know About Payroll Taxes?
For the most part, payroll taxes, what they entail, what they go toward, and who pays them are all relatively straightforward matters. That said, sometimes employees may question the transparency behind payroll taxes, especially if they are not sure what is being deducted (and why). A principle of tax deductions is that the person paying them should always understand where their money is going. For example, when employees first start a job, it might be helpful to tell them that they will be paying into Social Security and Medicare taxes so that there are no surprises.
In Sum: Knowledge Iis Power When It Comes to Payroll Tax
In short, when employees see money taken out of their paycheck without understanding why, they may feel confused. That’s why it might also help that they know what Social Security and Medicare are, even if it is just a brief summary. For example, Social Security provides financial protection for people once they reach retirement age or can no longer work, while Medicare is an important health insurance program for Americans who have worked hard for many years.
The more employees understand about payroll taxes and where their money goes, the less surprised they will feel when they receive that first paycheck.