Typical payroll check stubs include five key withholding categories, from income tax to disability insurance. Where do all these deductions end up? Which ones are employers responsible for? The Intuit Small Business Blog asked Michael J. Borenstein, a Los Angeles-based Certified Public Accountant, to give us the low-down in laypeople’s terms.
ISBB: What payroll taxes get taken out of an employee’s salary?
Borenstein: Various payroll taxes are withheld from an employee’s wages. The rates for Social Security taxes and Medicare taxes in 2011 are 4.2 percent and 1.45 percent, respectively. These taxes are used to pay for the federal programs: They are credited to the Social Security and Medicare trust funds, and the employee is credited with having paid into both.
Next is federal income tax, which is deposited into the U.S. Treasury general fund when the employer pays the withholding to the IRS. Employees are credited with the amount withheld against their federal income-tax liability when they file Form 1040.
If applicable, state income tax is treated the same as federal income tax, but the withholding is paid to the state rather than the federal treasury.
Finally, at least here in California, state disability insurance tax is withheld and paid into a fund that employees can draw upon if an injury prevents them from being able to work. The amounts of these taxes are reported to the employee on Form W-2.