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Table of Contents

  1. What Are Payroll Taxes?
  2. How Is Income Tax Calculated?
  3. What Is the Federal Minimum Wage?
  4. How Do I Withhold Taxes for Supplemental Wages?
  5. What Are Valid Filing Statuses?
  6. How Is Social Security Tax Divided?
  7. What Are the Tax Rates for Medicare?
  8. What Are the Tax Rates for Federal Unemployment Insurance?
  9. What Are the Contribution Limits for Retirement Plans?
  10. What are Health Savings Account (HSA) Limits?
  11. What is Mileage Allowance?

What Are Payroll Taxes?

Payroll or employment tax is paid on the wages and salaries of employees and levied by federal, state, and local governments to fund social insurance programs. These taxes are direct contributions from employers and are deducted from employees’ paychecks.

What Are Examples of Payroll Taxes?

Most payroll taxes exist at the federal and state levels.

  • Federal payroll tax: Also known as Federal Insurance Contribution Act (FICA), this tax is split into two parts, one for Medicare and one for Social Security.
  • Social Security payroll tax: Split evenly between employer and employees until the employee reaches the wage base of $160,200.
  • Medicare payroll tax: Split evenly between employer and employee. If the employee makes more than $200,000, they may have to pay an additional Medicare tax that the employer does not.
  • Unemployment tax: Employers pay federal unemployment tax (FUTA) on the first $7,000 that every employee earns. States are the same, however, there are a few states where employees also contribute to this tax.
  • State and local payroll tax: some areas may have additional payroll taxes for short-term disability, paid family leave, and other programs.

What Are the Differences Between Payroll Tax and Income Tax?

Payroll taxes are a flat rate sent directly to the program for which they help fund such as Social Security, Medicare, and more. Income taxes are a percentage of total income and are paid to the Department of Treasury.

The Internal Revenue Service (IRS) establishes guidelines for federal payroll and income taxes. Guidelines are adjusted annually.

This information is provided as a courtesy and may be updated at any time. It is not intended as legal or tax guidance. If you have questions or concerns, we encourage you to seek the advice of a qualified CPA, Tax Attorney, or Advisor.

Page current as of January 2023.

How Is Income Tax Calculated?

The amount of tax withheld depends on two things:

  • Amount employee earns
  • Information provided on the federal W-4

There are two common ways to calculate federal income taxes to withhold from employees manually:

  • Percentage Method: The percentage method provides a more accurate amount to withhold and will closely match the amount.
  • Wage-Bracket Method: This has a maximum of ten allowances and limits the wages that can be used to calculate withholding, generally less than $100,000.

Reference the tables in IRS’s Pub. 15-T, Federal Income Tax Withholding Methods for details.

Why Is the Federal W-4 Critical for Tax Withholding Calculations?

New employees will need to fill out a federal W-4 that indicates their filing status, multiple job adjustments, the number of deductions, and any additional amounts they wish to withhold from each paycheck. This will help you determine what will need to be withheld from their paycheck and supplemental paychecks. You’ll need to keep a signed W-4 for each employee in your records for at least four years.

How Do I Calculate How Much to Withhold for My Employees?

The Tax Withholding Estimator is a tool that helps calculate the amount of federal income tax to withhold from employees’ wages. Employees can see how their refund will be affected by the amount withheld and get an accurate recommendation on how much to withhold.

What Is the Federal Minimum Wage?

Wage Type

Minimum Rate

Minimum Wage Rate

$7.25 per hour

Tip Minimum Cash Wage

$2.13 per hour

Actual Tip Credit

$5.12 per hour

Wage Type

Minimum Rate

Minimum Wage Rate

$7.25 per hour

Tip Minimum Cash Wage

$2.13 per hour

Actual Tip Credit

$5.12 per hour

 

How Do I Withhold Taxes for Supplemental Wages?

Supplemental wages are payments in addition to an employee’s regular paycheck. So, if you provide supplemental wages to your employees, such as a bonus, severance pay, overtime pay, paid sick leave, and any incentive awards or commission, there will be additional federal income tax due. Supplemental wage taxation for federal income tax can be handled in one of two ways:

  • Percentage Method: Withhold a flat percentage on supplemental wages
  • Aggregate Method: Combine supplemental and regular wages

The percentage method is the easiest method, simply withhold the flat rate (22%), unless supplemental wages are over $1 million.

The aggregate method can vary depending on how you pay your employees. If you pay their regular wages plus supplemental income in one paycheck, then you would need to withhold the tax the same way you would for their regular paycheck, and you would not need to use the supplemental tax rate.

If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If you pay an employee their supplemental wages on a separate check, you’ll need to add together their regular wages plus the supplemental wage to find the total taxable income bracket percentage that you’ll need to withhold.

What If the Supplemental Wage Is More than $1 Million?

If you're issuing a bonus amount of $1 million or less during the year and the amount is identified separately from wages, employers should withhold a flat 22%. Any amount more than $1 million dollars should be taxed at 37% or the highest income tax rate for the tax year.

What Are Valid Filing Statuses?

Filing status is used to determine the filing requirements, standard deduction, eligibility for certain credits, and the correct tax amount. Here are the filing statuses:

  • S = Single
  • M = Married
  • H = Head of Household
  • NRA = Non-Resident Alien
  • NRH = Head of Household Non-Resident Alien
  • NRM = Married Non-Resident Alien

What Are Exemptions and Who Is Subject to Exemptions?

An income tax exemption reduces the amount of income or revenue subject to tax. The following roles are exempt from paying supplemental income tax.

  • Agricultural labor
  • Aliens
  • Casual labor
  • Combat pay
  • Clergy
  • Directors of a corporation
  • Domestic service
  • Family employment
  • Federal government employees
  • Fishing industry employees
  • Foreign government employees
  • Hospital patients who are employees
  • International organization employees
  • Persons serving in the military service
  • Newspaper carriers and news vendors
  • Nonprofit organizations; nurses and interns
  • Public transportation employees
  • Railroad employees
  • State and local government employees and students
  • U.S. citizens and residents working outside the U.S.
  • Persons performing volunteer service

Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year.

How Is Social Security Tax Divided?

Social Security pays monthly benefits to retirees and their families, as well as to surviving spouses and children of workers who have died. It also pays benefits to people with disabilities and their families.

Tax Calculations

Amount / Rate

Social Security Taxable Wage Base

$160,200

Employee Rate

6.20%

Employer Rate

6.20%

Maximum Social Security Tax

$9,932.40

Tax Calculations

Amount / Rate

Social Security Taxable Wage Base

$160,200

Employee Rate

6.20%

Employer Rate

6.20%

Maximum Social Security Tax

$9,932.40

 

What Are the Tax Rates for Medicare?

Medicare tax goes into a trust fund that pays for some costs of hospital and related care/expenses of all Medicare beneficiary.

Tax Calculations

Rate

Medicare Taxable Wage Base

Unlimited

Employee Rate

1.45%

Employer Rate

1.45%

Additional Rate over $200k (MEDHI)

0.9%

Tax Calculations

Rate

Medicare Taxable Wage Base

Unlimited

Employee Rate

1.45%

Employer Rate

1.45%

Additional Rate over $200k (MEDHI)

0.9%

 

What Are the Tax Rates for Federal Unemployment Insurance?


Unemployment tax is paid for by employers and covers the costs of administering Unemployment Insurance and Job Service programs in all states. State unemployment insurance varies by state and is used to cover state workers.

Tax Calculations

Amount / Rate

Unemployment Taxable Wage Base

$7,000

Employee Subject to UI Tax?

No

Unemployment Tax Rates (not considering possible 5.4% credit)

6.0%

Tax Calculations

Amount / Rate

Unemployment Taxable Wage Base

$7,000

Employee Subject to UI Tax?

No

Unemployment Tax Rates (not considering possible 5.4% credit)

6.0%

 

What Are the Contribution Limits for Retirement Plans?

The IRS sets limits on how much employers and employees can contribute to pre-tax deferrals so that those who can afford to defer larger amounts of compensation don’t take advantage of tax benefits.

Retirement Plan Type Based on Salary

Compensation Limit

401(a)(17) Compensation Limit

$330,000

414 (q)(1) Highly Comp Employees

$150,000

Retirement Plan Type Based on Salary

Compensation Limit

401(a)(17) Compensation Limit

$330,000

414 (q)(1) Highly Comp Employees

$150,000

Highly compensated employees have different limits. A highly compensated employee is determined by an ownership test and a compensation test set by the IRS. Typically, if the employee owned 5% of the business or is one of the top 20% highest paid employees, making at least $150,000, they are considered highly compensated.

Contribution Limits by Plan Type:

Elective Deferrals & Contribution Limits for 2023

401(k)

$22,500

403(b), 408(k) SEP, and 457

$22,500

408(p) SIMPLE

$15,500

Catch-Up Contributions for Over 50

· $7,500 for 401(k), 403(b), 408(k) SEP and 457

· $3,500 for 408(p) SIMPLE

Contribution Limits by Plan Type:

Elective Deferrals & Contribution Limits for 2023

401(k)

$22,500

403(b), 408(k) SEP, and 457

$22,500

408(p) SIMPLE

$15,500

Catch-Up Contributions for Over 50

· $7,500 for 401(k), 403(b), 408(k) SEP and 457

· $3,500 for 408(p) SIMPLE

The basic employee contribution limit for 2022 is $20,500. This limit includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k) or a Roth 401(k) plan. However, if you are 50 or older, you can contribute an additional $7,500 as an extra “catch-up contribution.”

Employers can also make elective contributions regardless of how much or how little employees contribute, up to a certain amount.

What are Health Savings Account (HSA) Limits?

HSA can use pre-tax income to cover healthcare costs that insurance doesn’t pay.

HAS Coverage Type

 Contribution Limit

Self Only Coverage

 $3,850

Family Coverage

 $7,750

Catch-Up Contributions (55 or older)

 $1,000

HAS Coverage Type

 Contribution Limit

Self Only Coverage

 $3,850

Family Coverage

 $7,750

Catch-Up Contributions (55 or older)

 $1,000

 

What is Mileage Allowance?

Mileage Allowance rates are used to calculate tax deductions and employee reimbursements when workers use a personal vehicle for business, charitable, medical, or moving purposes. There’s currently no federal requirement for organizations to provide mileage reimbursements, but some states (California, Illinois, and Massachusetts) do have such mandates.

Organizations can choose to reimburse the actual amount an employee incurred on the trip or use a specific rate for each mile the employee drove, usually less than $1 per mile. However, reimbursements and deductions are only applicable to certain qualified transportation expenses, such as visiting a client or attending a business meeting somewhere other than the normal office.

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