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Whether you are an employee or an employer, payroll taxes apply to both. Have you ever wondered, how much do employers pay for payroll taxes? Similarly employees pay for payroll taxes out of their paychecks as well.
What is Payroll Taxes?
Payroll Taxes are taxes paid by employees and employers on salaries and wages of employees. These taxes are pooled together with other employees and employers and used for social insurance programs. According to the research done by Tax Foundation, these taxes are little over 23% of the total revenue that Government collects.
Who Pays for Payroll Taxes?Employees Pays taxes such as Social Security(FICA), Medicare Taxes and state taxes such as SDI(State Disability Insurance)
Employers pay matching Social Security(FICA) and Medicare taxes as well they pay FUTA and other state taxes such as Unemployment Insurance(UI) Employer training taxes and so on. Each state has different taxes that employees and employers may be responsible for paying.
What is Payroll Tax Percentage for Employees?Employees pay 6.2% Social Security FICA taxes on salary up to $147000 in 2022(This amount changes each year), 1.45% Medicare taxes to Federal Govt. State Taxes Vary based on each state and programs they have.
For example California payroll taxes for employees include SDI(State Disability Insurance) The SDI rate for the calendar year 2022 is 1.10 percent for the earned salary. The taxable salary limit is $145,600 for each employee for each calendar year.
How Much do Employers Pay for Employers Taxes?Federal Payroll TaxesEmployers pay matching 6.2% Social Security FICA taxes, 1.45% Medicare taxes to Federal Govt. In addition they pay FUTA taxes.
FUTA tax rate is 6% of the first $7,000 of wages of each employee per year.
State Payroll Taxes(CA)State Taxes Vary based on each state and programs for employers. For example California payroll taxes include UI & ETT.
UI is paid by the business owner. Small business owner(Employer) pays a percentage on the first $7,000 in wages paid to each employee per year. This amount typically starts at 3.4% and may increase or decrease based on if you have laid off many employees.
The Employer Training Tax rate for 2022 is 0.1 percent. The Employer Training Tax taxable wage limit is $7,000 for each employee per calendar year.
Payroll Tax Example (Employee & Employer)For example John is an employee for ABC Plumbing and earns salary of 100,000 per year.
Employee Payroll Tax Example
John will pay the following:
6.2% of $100,000 in Social Security= $6,200
1.45% of $100,000 in Medicare Taxes = $1,450
1.10% SDI taxes to California = $1100
Employer Payroll Tax ExampleABC Plumbing will pay the following Taxes as an employer:
6.2% of $100,000 in Social Security= $6,200
1.45% of $100,000 in Medicare Taxes = $1,450
6% of $7,000(up to) $420 on behalf of John
3.4% for UI =$238 (Assuming rate of 3.4 Percent)
0.1% for ETT up to $7,000 Wages per employee = $7
How to Avoid Paying Payroll Taxes?
Payroll taxes are automatically collected from employees payroll taxes. Hence its not really possible to avoid paying taxes on your earned income as an employee.
Employers can help lower payroll taxes by incorporating as an S Corp. Instead of paying payroll taxes on your entire earned income you can avoid paying payroll taxes on a large amount of K1 or distributions from a S Corp.
You pay payroll taxes on W2 from S Corp but not on K1 from S Corp. Hence successfully lowering your payroll taxes.
Furthermore, you can also avoid paying payroll taxes on your income, if you can earn your income from other sources instead of employment.
Example of this type of income will be Real Estate Rental Income. When you receive income from real estate rent, you don’t have to pay payroll taxes on such income.
Other example of such income will be capital gains from Stocks or sale of assets. You can make money from selling your
