Some employment taxes, such as the federal unemployment tax, are paid by the employer. Some, including California’s disability insurance tax, are paid by the employee. Others are paid by employer and employee; employers, for example, contribute a specific amount toward employees’ Social Security and Medicare tax liabilities. Depending on the state, the employer and employee also pay state unemployment tax.
Social Security Tax
The Federal Insurance Contributions Act, or FICA, governs Social Security tax. Employers, employees and self-employed people must pay into the Social Security system, which provides retirement, beneficiary and disability benefits to eligible individuals. The taxes collected for Social Security go into a trust fund from which monthly benefits are paid. Usually, the employer and the employee pay the same amount for Social Security tax, but there have been exceptions. For example, the employee rate in 2011 and 2012 was 4.2 percent. Employers paid 6.2 percent. As of the time of publication, employers and employees each pay 6.2 percent.
Read More: Does Federal Tax Include Social Security & Medicare?
Medicare encompasses the other half of FICA. Employers, employees and the self-employed pay Medicare tax, which provides hospital insurance to people 65 and older. Specific individuals younger than 65 may qualify for Medicare, such as those who are disabled or suffering from permanent kidney damage. The employer and employee are typically taxed at the same rate. As of the publication date, both paid 1.45 percent. Employees who earn more than $200,000 pay an additional Medicare tax of 0.9 percent on the overage; employers are excluded from this extra rate.
Annual Wage Base
Social Security tax is taken out of wages, up to a certain amount for the year. The annual wage limit is $118,500 at the time of publication. Employers, employees and the self-employed stop paying the tax once they earn the yearly cap. Medicare tax has no annual wage base and comes out of all wages.
State Unemployment Tax
State unemployment tax provides unemployment compensation to qualified employees who have lost their jobs. As of the time of publication, three states require employers and employees to pay state unemployment tax: Pennsylvania, New Jersey and Alaska. Each state has its own rates and annual wage base. For example, employers in Pennsylvania pay unemployment tax at their assigned rate on the first $9,000 paid to each employee. Contributions are withheld at a standard rate from employees’ entire annual gross wages.
- Social Security Administration.gov: Understanding the Benefits
- Tax Policy Center: Payroll Taxes
- Social Security Administration.gov: Medicare
- IRS.gov: Topic 751 -- Social Security and Medicare Withholding Rates
- Payroll Taxes: Alaska State Tax Information
- Payroll Taxes: New Jersey State Tax Information
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.