Payroll tax in the United States

Payroll tax in the United States
Name	Payroll Tax
Country	United States
Subdivision1	Federal
Subdivision2	State & Local
Type	Withholding tax
Admin agency	Internal Revenue Service
Related taxes	Income Tax, Self-employment tax

Payroll tax in the United States. Payroll taxes in the United States are levies imposed on wages and salaries to fund specific social insurance programs, primarily Social Security and Medicare. Administered at both the federal and sub-national levels, these taxes constitute a significant source of government revenue and a mandatory contribution from most workers and employers. The structure and rates are primarily governed by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA).

Overview

The modern U.S. payroll tax system originated with the Social Security Act of 1935, signed into law by President Franklin D. Roosevelt. This legislation established the framework for taxing wages to fund retirement benefits, later expanded to include disability and health insurance under programs like the Old-Age, Survivors, and Disability Insurance program. Key subsequent legislation, such as the Social Security Amendments of 1965 which created Medicare, further shaped the tax base. These taxes are distinct from the broader federal income tax as their revenue is earmarked for trust funds like the Social Security Trust Fund and the Medicare Trust Fund, rather than the general treasury of the United States Department of the Treasury.

Federal payroll taxes

Federal payroll taxes are primarily collected under FICA and SECA. FICA taxes fund both the Social Security and Medicare programs, with specific rates applied to employee wages and matched by employers. The Social Security Administration oversees the benefit side of these programs. For self-employed individuals, SECA imposes an equivalent tax, often referred to as the Self-employment tax, covering both the employer and employee portions. Additional federal payroll taxes include the Federal Unemployment Tax Act (FUTA) tax, which funds state unemployment insurance administrations and is paid solely by employers, and withholdings for the Affordable Care Act's additional Medicare tax on high earners.

State and local payroll taxes

All states, plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, administer their own payroll taxes for unemployment insurance and, in most cases, Workers' compensation programs, often through agencies like the California Employment Development Department. Several states and localities impose additional payroll taxes to fund specific initiatives; for example, New York State has a Metropolitan Commuter Transportation Mobility Tax for the Metropolitan Transportation Authority, while San Francisco levies a tax to fund its Healthy San Francisco program. Cities like Portland and Cleveland have local income taxes that function as payroll taxes.

Tax rates and wage bases

For 2023, the Social Security tax rate is 6.2% each for employer and employee, applied to earnings up to the taxable wage base of $160,200, as set by the Social Security Administration. The Medicare tax rate is 1.45% each, with no wage cap. High-income earners face an additional 0.9% Medicare tax under the Affordable Care Act, applicable to income above thresholds set by the Internal Revenue Service. FUTA tax is 6.0% on the first $7,000 of wages, though credits reduce the effective rate. State unemployment tax rates, such as those set by the Texas Workforce Commission, vary by employer experience and state law.

Employer and employee responsibilities

Employers are legally required to withhold the correct FICA taxes from employee wages, match those contributions, and remit them to the Internal Revenue Service along with federal income tax withholdings, typically using Form 941. They must also pay state unemployment taxes to agencies like the Illinois Department of Employment Security and any applicable local taxes. Employees see their share of FICA taxes itemized on their Form W-2. Self-employed individuals calculate their SECA liability on Schedule SE of Form 1040. Failure to comply can result in penalties from the IRS.

Economic and policy considerations

Payroll taxes are a major topic in economic policy debates, often analyzed by institutions like the Congressional Budget Office and the Urban Institute. Critics, including some members of the United States Congress, argue they are regressive due to the Social Security wage cap. Proposals for reform, such as those from the Social Security Advisory Board, often include raising or eliminating the cap. These taxes significantly impact labor costs for businesses and take-home pay for workers, influencing decisions by the Federal Reserve and discussions around programs like the Earned Income Tax Credit. The long-term solvency of the Social Security Trust Fund remains a central issue in federal policy.

Category:Taxation in the United States Category:Social Security (United States)