Payroll tax deductions are calculated using the IRS W-4 form, which gives an employer the information needed to determine the deduction for an employee, the Houston Chronicle explains. This form lets the employer determine all necessary deductions, including personal income and Social Security taxes.
The three main categories of payroll taxes an employer must pay are federal income taxes, Medicare and Social Security taxes. In addition to the taxes that an employer pays from an employee’s wages, they must pay the same amount themselves. Besides this, employers have an additional expense in the form of Federal Unemployment Taxes (FUTA), which go towards state-level unemployment programs, says the Houston Chronicle.
The rates and other characteristics of income taxes, Medicare and Social Security taxes vary significantly, the Houston Chronicle explains. The federal income tax is progressive, meaning that the more an employee earns, the greater the taxable proportion of his income (up to a certain level). Medicare and Social Security taxes differ in their wage base limit, or the maximum wage amount subject to taxation. Medicare has no wage base limit, but any wages in excess of a certain amount (in 2011, this was $106,800) will not be subject to Social Security taxation. Note that Social Security taxes can vary considerably. For example, Social Security is typically taxed at 6.2 percent of an employee’s compensation, but in 2011 this was reduced to 4.2 percent, due to 2010 legislation.