What You Should Know About The Payroll Tax

payroll tax

What is the payroll tax? There are those who have no opinions on these taxes at all, while some employers argue the taxes are a burden to small businesses. Some describe payroll taxes as “an ambiguous penalty for hiring someone” while others describe specific details of the payroll tax such as the funding of Social Security and Medicare as being important parts of the American economic infrastructure.

Social Security And Medicare Withholding

When you review your pay stub, look at the line for FICA and MICA? These are taxes that are withheld from your paycheck to fund Social Security and Medicare. At the time of this writing, the Internal Revenue Service official site describes these taxes as follows:

  • The current tax rate for Social Security is 6.2% for the employer
  • The current tax rate for Social Security is 6.2% for the employee
  • The total is 12.4%
  • The current rate for Medicare is 1.45% for the employer
  • The current rate for Medicare is 1.45% for the employee
  • The total is  2.9%

You read the above correctly–if you are an employee, your boss is also paying the same amount in FICA and MICA taxes.  There’s an argument against withholding these taxes; some believe statements like the following: “Yes, your paystub only reflects half of the cut today’s retirees take out of every dollar you earn.” These arguments usually ALSO assert that no one under the age of 65 paying these taxes today will see a dime of this money.

But arguments against withholding FICA and MICA taxes cut both ways. The non-partisan Center on Budget and Policy Priorities reminds, “Over 64 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in June 2020. While older Americans make up about 4 in 5 beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance (SSDI) or were young survivors of deceased workers.”

Unemployment Insurance

There are other objections to U.S. payroll taxes. Some complain that in addition to FICA and MICA ‘burdens”, federal law also requires the employer to pay for unemployment insurance for their workers.  States administer this program so rates vary, but typical costs for this nationwide range from 2-6%, with 4% being a good average.  So for your $1000 a week employee, add another $40 a week for unemployment insurance and now employers are paying $1,115 for that employee to take home $925, before income taxes.

The argument against this is that it “discourages growth, so the employer is encouraged to look for alternate methods of getting tasks completed if every $1000 employee costs them $1115, which by the way is $460 extra per month, per employee”.

But unemployment insurance is a protection for the employee–NOT the employer, and should be considered a cost of doing business. Naturally, in a labor-versus-management context, the employer is going to object to the notion of unemployment insurance, but the laborer deserves and has earned this protection by working for the company.

Employer Tax Breaks

Some bosses make statements like the following: “If we truly want to stimulate hiring, we have to curb these taxes…the payroll tax keeps small businesses from growing, it hurts the employer who forgoes the potential for more profit…” But the NUMBER ONE ARGUMENT against this notion? The official site for Bench, an accounting and bookkeeping firm, reports that MICA and FICA taxes are traditionally deductible for the employer.

P.S. W2 employees interested in minimizing their tax burdens may want to review a copy of Lower Your Taxes – BIG TIME! 2017-2018 Edition: Wealth Building, Tax Reduction Secrets from an IRS Insider.

Keep in mind that tax laws change frequently and you will need to consult a tax professional about the advice you get from this book to see whether it will apply in the current tax year.