Understanding Payroll Taxes

Ever wonder what those deductions on your paystub are? Some of them are payroll taxes. Payroll taxes fund social insurance programs such as Social Security, Medicare and unemployment (as opposed to income taxes, which go to a collective treasury). Read on to learn about what you’re paying for and how much you’re required to pay.

Social security taxes support federal insurance programs that provide retirement and disability benefits to people who qualify. The Social Security tax is 6.2% of your gross income. You might be surprised to learn that your employer is also responsible for contributing. Employers must pay a matching amount (an additional 6.2% of your gross income).

Social security taxes have a base limit, meaning the IRS will stop taxing you on income over a certain amount that typically changes every year. In 2024, the IRS will stop collecting social security taxes on any income you make over $168,600.

Medicare

These taxes go to federal health insurance programs. The Medicare tax is 1.45% of your gross income plus a matching 1.45% from your employer. If an employee makes over a specified income threshold, they will be taxed another 0.9%. The income threshold changes for different filing statuses, so check the IRS website for current limits.

Unemployment

Employers are solely responsible for paying unemployment taxes, so you don’t have to worry about them. Unemployment tax funds go to state and federal insurance programs to help those who qualify when they’re out of a job. The tax rates and thresholds vary by location and industry.

Self-Employment

The self-employment tax is a Medicare and Social Security tax for self-employed individuals. Self-employed individuals must pay both the employer and employee portion of Medicare and Social Security taxes.

The self-employment tax rate is 15.3% of net earnings, consisting of a 12.4% Social Security tax and a 2.9% Medicare tax on net profits. The 2024 base limit is $168,600 which is the same as for taxpayers who are not self-employed.

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Read more articles like this on HZCU’s Financial Knowledge Hub.

At Horizon we’re great at banking, but we’re not tax professionals! If you have questions about your specific tax situation, make sure to consult a tax expert. You can also learn more on the IRS website.