What is the payroll tax

what is the payroll tax

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If you work as an employee, you split the Social Security tax with your employer so you each pay half of it. For example, in 2010 you pay 6.2 percent of your income as the Social Security tax and your employer pays 6.2 percent. As of 2010, the limit for the Social Security tax is $106,800, which means that the most an employee would pay in Social Security taxes is $6,621.20. However, the annual limit is adjusted each year for inflation.

Self-Employed Individuals

For self-employed individuals, the Social Security tax effectively doubles because you do not get to split the tax with your employer. For example, as of 2010, the Social Security tax rate for self-employed individuals is 12.2 percent. Since the Social Security tax only applies to the first $106,800 of your income for the year, the most a self-employed individual would pay in Social Security taxes

in 2010 would be $13,243.20.

Mixed Employment

If you have some income from self-employment and some income from work as an employee, the Social Security tax applies first to your work as an employee. This is beneficial because the rate for you is higher on your self-employment earnings. For example, if in 2010 you have $100,000 in employment earnings and $40,000 in self-employment income, you would pay the 6.2 percent rate on the first $100,000 and the 12.4 percent rate on only the first $6,800 of your self-employment income.


The benefit to paying more in Social Security taxes is that you will receive a larger Social Security check when you reach retirement age. Your Social Security check is based on your earnings over your working years. In addition, if you are self-employed, you are permitted to claim an income tax deduction for half of the Social Security tax that you pay.

Source: ehow.com

Category: Bank

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