Does Pension Get Taxed if Continue to Work
Everyone knows that sinking feeling when your paycheck arrives and it ends up so much smaller than you expected it to be. Payroll taxes take a chunk out of an employee's bottom line, but they are a responsibility and obligation for businesses big and small. Whether you are an employee curious about where the money goes or someone running a business, you can benefit from understanding the ins and outs of payroll taxes.
What are Payroll Taxes?
Payroll taxes are federal, state, and local taxes that businesses must withhold from employee paychecks. Several different taxes are included under the larger umbrella of payroll taxes, including federal and state income taxes, unemployment taxes and Federal Insurance Contributions Act (FICA) taxes, which cover deductions for Social Security and Medicare taxes. Money withheld for Medicare deductions may also be referred to as the "Medicare payroll tax" or just the "payroll tax," which sometimes creates confusion. Some states, including California, Hawaii, New Jersey, Rhode Island and New York, require that employers also withhold taxes for disability insurance programs.
Employees and employers pay payroll taxes. Employers take on unemployment taxes on their own. Employees are responsible for federal and state income taxes and FICA taxes. These employee taxes are withheld from employee wages and sent to their respective funds. When an employee files their taxes at the end of the year, they may or may not get a tax credit, known commonly as a refund, from the federal and state income tax funds.
Payroll Taxes and the Self-Employed
The self-employed function under slightly different rules. Essentially, they are responsible for paying their own taxes. The self-employed typically make installments towards their estimated tax owed for the year. In some cases, self-employed individuals may incorporate their company; if they have no outside employees, they have an obligation to withhold payroll taxes from their own paychecks.
Independent Contractors and Relationship Tests
Independent contractors often cause some confusion for businesses. Many independent contractors do months or even years of work at a company without officially being on the payroll, at least in terms of taxes. The best way to distinguish between independent contractors and employees on the payroll is to consider whether or not you control and drive their business behavior. You typically only have say over the product created by an independent contractor, while with an employee, you oversee conduct, work hours, and so on. Like the self-employed, an independent contractor is responsible for paying his or her own payroll taxes.
Calculating Income Taxes
The IRS provides employers with two tax tables that you can use to determine how much federal income tax to withhold. These tax tables calculate income tax by wage bracket and a percentage method. To use these tables, first determine how often you pay the employee. Then, using the employee's taxable income, cross-reference that amount with the employee's filing status. The wage bracket table is best if you pay your employees on a set schedule across the company, while the percentages table is better if you pay employees on different schedules or on a quarterly basis. State tax boards all provide similar tables for calculating income tax at the state levels.
Calculating FICA Taxes
The federal government requires that you and your employees split FICA taxes. The combined rate is 15.3 percent, 12.4 percent of which goes to Social Security and 2.9 percent of which goes to Medicare. You can calculate the employee share at a flat rate of 4.2 percent for Social Security and 1.45 percent for Medicare. Your share is 6.2 and 1.45, respectively.
Calculating Unemployment Taxes
You also need to withhold and calculate unemployment taxes under the Federal Unemployment Tax Act (FUTA) as an employer. The FUTA rate changes often; confirm the current rate with the IRS. It typically is around 6 to 6.5 percent. You must pay FUTA taxes if you pay any employee more than 1,500 dollars in a quarter or if you have at least one employee hired for 20 weeks in the calendar year. Keep in mind that you can claim credits against your state unemployment tax obligations that can significantly reduce your FUTA obligation.
Source: https://www.questionsanswered.net/article/how-do-payroll-taxes-work?utm_content=params%3Ao%3D740012%26ad%3DdirN%26qo%3DserpIndex&ueid=020687b1-b609-46bd-8345-5fd507324144
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