Back to Basics: Paycheck Taxes

One of the most critical components to keeping a business in compliance is taxes. Ensuring employees are paid the correct taxes every paycheck can become a daunting task if done manually. One in four employees has found themselves receiving inaccurate paychecks, while 82 percent of employees at large employers say their checks are "always on time." This leaves 18 percent of employees wondering what happened to their paycheck.

Income vs. Payroll Taxes

Income taxes and payroll taxes may seem similar, but the main difference is who is responsible for paying what tax. Income taxes pertain to Federal, State, and Local income taxes. They are only the employee's responsibility and are a complex tax taken from an employee's salary or wage. Income taxes are complex because they have flexible rates that are decided on multiple factors and compose the majority of tax return calculations. Income taxes fund government spending such as defense, transportation, education, and security. Income taxes also make up a larger share of the taxes withheld from an employee's paycheck because the more an employee earns, the more income tax they will pay.

Payroll taxes are Social Security taxes and Medicare taxes. Payroll taxes are paid by both the employee and the employer. They are more straightforward because they are considered regressive. The more an employee earns, the lower the percentage of their salary will be taxed. Payroll taxes also take up less of the total tax withheld from an employee's paycheck. Despite the differences, income and payroll taxes need to be withheld from employees' paychecks when the employer runs payroll.

Digging Deeper

Social Security and Medicare Taxes

Social Security and Medicare were established by the Federal Insurance Contributions Act (FICA). FICA established two taxes: Old-age, Survivors, and Disability Insurance Taxes, known as Social Security taxes, and Hospital Insurance Taxes or Medicare taxes.

Social Security and Medicare are also paid through payroll deductions or withholdings. Employees pay a tax of 6.2 percent on a wage base of $147,000 for Social Security and 1.45 percent of their wages for Medicare, totaling 7.65 percent of an employee's earnings per paycheck.

Employers must also pay FICA taxes and are responsible for reporting their own share and their employees'. Employers pay the same amount as their employees, 6.2 percent for Social Security and 1.45 percent for Medicare.  

Federal Income Tax

The federal income tax withheld from a paycheck depends on the amount the employee earned and the information given on the employee's W-4 form. Together, the amount is calculated and withheld from each paycheck. 

The revenue from federal income taxes is mainly used to fund:

• Other social insurance benefits
• Defense
• Security

State Income Tax

State income taxes can become tricky as they apply to specific states, and some states may not tax income at all. Generally, states will take one of three different approaches to this tax. A state will either:

1. Have no income tax at all.
2. Have a flat tax meaning the state will tax all income or dividends at the same rate.
3. Have a progressive tax which implies that if an individual has a higher taxable income, they will pay a higher tax.

States with a state income tax usually provide a form for employees to fill out indicating which percentage rate an individual would like taken out of their paycheck each pay period. 

Local Income Tax

Local income taxes, also known as municipal taxes, are taxes some governments place on people who live or work in a specific area. It is a separate tax from federal and state income taxes, and only states that impose state income taxes also impose local income taxes.

Local income taxes are used to fund a variety of programs, such as 

• Community improvement projects like roads
• School districts 
• Local parks

Not all local income taxes are the same. They can each be calculated differently and exist for a different amount of time, depending on the project or community needs. Like state income taxes, there are three common ways to calculate local income taxes; a flat rate, a progressive tax rate, and a flat dollar amount. As local tax rates can change, companies should stay updated with withholdings and records to remain as compliant as possible.

Symmetry Powers Every Paycheck

Manually calculating the taxes above can be time-consuming and daunting. Even the slightest error can lead to significant consequences, including audits, fines, and reputational risk. Symmetry Software provides the tools and expertise needed to avoid those mistakes and keep payroll service providers in compliance. 

Symmetry provides a fully integrated suite of payroll APIs and software tools to ensure employee and employer taxes are correctly calculated and managed. Our suite contains six powerful tools and software, including:

• Symmetry Tax Engine
• Symmetry Payroll Point
• Symmetry Payroll Forms
• Calculators by Symmetry
• Minimum Wage Finder 
• Tax Notification Service