What do you generally do with your paycheck? Most of us check the take-home pay, see how much money has been deducted, and just ignore it once the salary is deposited. What we fail to understand is the amount of money that is deducted as taxes and other benefits that help us in the long run.
To start with, you need to know how your employer has created the paystub that you get every month. Many employers these days use a paystub generator to get this job done, as doing it manually can take a lot of time, effort, and money.
First, using the pay stub maker, your employer will ask you to fill a W2 form online that calculates all the tax you will pay each month. The check stub maker software will calculate this and make sure you are paying the right amount.
All about payroll taxes
A payroll tax refers to all the taxes that you pay every month. This consists of two separate taxes- Medicare and Social Security. The latter is a supplementary income for retirees, the disabled, and the dependents of retirees.
Medicare is a national healthcare program that benefits people when they reach the age of 65. Started in 1966, this is an important benefit for employees in the US.
Both Social Security and Medicare are together called the FICA. This is an abbreviation of the Federal Insurance Contributions Act.
Misconceptions about payroll taxes
Many people think the payroll taxes they pay are part of their ‘income taxes’. They do not realize that these two are distinct income deductions that are way different.
Besides the FICA-based payroll taxes, employees also have to pay federal and state taxes. FICA-based taxes are supposed to be paid by the employer while the employees are solely responsible to pay the federal and state taxes.
Other taxes the employee might have to pay are State and Federal Unemployment taxes and other income-based taxes.
How is the payroll taxes calculated?
The FICA-based taxes are calculated at a flat rate of 12.4% which has to be split by both the employee and employer. This comes to about 6.2% by each entity.
However, this isn’t as simple as it sounds. As per the latest guidelines, it applies only to the first $137,700 of your total income. Any money made more than this is not taxable.
On the other hand, Medicare is a flat rate deduction. It works out to be 2.9%, both from the pockets of the employer and employee. An additional 0.9% is taxed on all wages exceeding $250,000 for those employees who are married or file their incomes jointly. If you aren’t married, this is halved to $125,000. For anyone who isn’t filing taxes in these categories, the amount on which taxes are calculated is $200,000.
Paying payroll taxes is both your and your employers’ responsibility. However, if you are finding it tedious to calculate the taxes and make payments, the best option available to you is to use pay stub software.