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Employment law

payroll taxes

A payroll tax is a percentage of the employee’s wages, salaries, and tips withheld by the employer and paid to the government on behalf of the employee. For example, federal payroll taxes are deducted from the employee’s earnings and paid to the Internal Revenue Service (IRS).

Payroll taxes are designated to fund specific government programs and income taxes are paid to the U.S. (or state) treasury for general expenses. For example, federal payroll taxes are deducted to fund Medicare and Social Security programs; are known as Federal Insurance Contributions Act (FICA) taxes; and are labeled as MedFICA and FICA on employee pay stubs. Payroll taxes are levied only up to a certain income level, and any income above that level is not subject to payroll taxes.

Although the employer is responsible for payment of payroll taxes, income tax is the employee’s responsibility. For federal income taxes the employer will typically withhold a percentage of the employee’s wages based on the federal withholding table and submit the funds withheld to the U.S. treasury—but it is the employee’s responsibility to pay any additional income tax due by the April 15 deadline—or to seek a refund if the amounts withheld by the employer are more than the employee owes. Most states and some cities and counties also impose income taxes—much of which may be withheld by the employer and paid to state, city, or county treasury.

Self-employed persons are also required to remit payroll taxes, and these are referred to as self-employment taxes.

In Texas, payroll taxes consist of federal taxes that are withheld from an employee's wages by their employer and remitted to the government. These taxes fund specific programs such as Medicare and Social Security and are known as Federal Insurance Contributions Act (FICA) taxes, appearing on pay stubs as MedFICA and FICA. The responsibility for paying payroll taxes lies with the employer, while income taxes are the employee's responsibility. Employers withhold a portion of wages for federal income taxes based on federal withholding tables and submit these funds to the U.S. Treasury. Employees must ensure they pay any additional income tax due by April 15 or claim a refund if they have overpaid. Texas does not have a state income tax, so there are no state payroll taxes withheld for state revenue purposes. However, self-employed individuals in Texas are required to pay self-employment taxes, which serve a similar purpose to payroll taxes for employees.


Texas Statutes & Rules

Texas Tax Code, Title 2. State Taxation, Subtitle F. Franchise Tax, Chapter 171
Texas does not have a state income tax, so there are no state-level payroll taxes for income tax withholding. However, Texas imposes a franchise tax on certain businesses, which is sometimes referred to as a 'margin tax' or 'business tax'.

The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. It is calculated based on the taxable entity's margin, which can be determined in several ways, including total revenue minus cost of goods sold, total revenue minus compensation, or total revenue times 70 percent. The tax rate varies depending on the type of business and amount of revenue. Certain small businesses with gross receipts below a specified threshold may be exempt from the franchise tax.

Texas Workforce Commission, Texas Unemployment Compensation Act, Title 4, Subtitle A, Chapter 201
While not a payroll tax, the Texas Unemployment Compensation Act requires employers to pay unemployment insurance taxes to fund the state's unemployment compensation system.

Employers in Texas are required to pay unemployment insurance taxes, which are used to provide temporary financial assistance to workers who have lost their jobs through no fault of their own. The tax rate is determined annually and is based on the employer's experience with the unemployment system (i.e., the number of former employees who have claimed unemployment benefits) as well as the balance in the state's Unemployment Compensation Trust Fund. Employers must report wages and pay the taxes on a quarterly basis.

Texas Workforce Commission, Texas Payday Law, Labor Code, Title 2, Chapter 61
The Texas Payday Law governs the timing and methods of wage payments, which is relevant to the withholding and remittance of federal payroll taxes by employers.

The Texas Payday Law requires employers to pay employees in full and on time on regularly scheduled paydays. Employers must comply with the employee's earnings withholding orders and are responsible for withholding federal income taxes and FICA taxes from employees' wages. The law also mandates that final paychecks be provided in a timely manner upon termination of employment, depending on whether the employee was fired or resigned.

Internal Revenue Code (IRC), Federal Law
While not a Texas state statute, the Internal Revenue Code is the federal law that governs the withholding of federal income taxes and FICA taxes, which is relevant to all employers operating in Texas.

Under the IRC, employers are required to withhold federal income taxes, Social Security taxes, and Medicare taxes from their employees' wages. The amount to withhold is determined by the employee's Form W-4 and the IRS withholding tables. Employers must also match the amounts withheld for Social Security and Medicare taxes and remit both the employee's and employer's portions to the IRS. Self-employed individuals must pay self-employment taxes, which cover their Social Security and Medicare tax obligations.

Federal Statutes & Rules

Federal Insurance Contributions Act (FICA) - 26 U.S.C. § 3101 et seq.
This statute is relevant because it establishes the requirement for payroll taxes to fund Social Security and Medicare.

The Federal Insurance Contributions Act (FICA) requires that a portion of an employee's wages be withheld for Social Security and Medicare taxes. Employers are also required to pay a matching amount for each employee. The tax is split into two parts: the Social Security tax, which is 6.2% on income up to the taxable maximum, and the Medicare tax, which is 1.45% on all wages. In addition, there is an Additional Medicare Tax of 0.9% that applies to wages exceeding a certain threshold. The combined tax rate for employees is 7.65%, and employers match this contribution for a total of 15.3% of the employee's wages. Self-employed individuals pay both the employee and employer portions, totaling 15.3%, but they may deduct the employer-equivalent portion in calculating their adjusted gross income.

Internal Revenue Code (IRC) - 26 U.S.C. § 3401 et seq.
This statute is relevant because it governs the withholding of federal income taxes from employees' wages.

The Internal Revenue Code (IRC) outlines the federal tax laws including the requirements for withholding income taxes from employees' wages. Employers must withhold federal income tax based on the number of allowances and filing status claimed by the employee on their Form W-4. The amount to withhold is determined by IRS withholding tables and the employee's earnings. Employers must then remit these withholdings to the IRS on a periodic basis, typically through electronic funds transfer. Employees are responsible for ensuring that enough tax is withheld to cover their tax liability and can adjust their withholding by submitting a new Form W-4 to their employer. If too much tax is withheld, the employee may be eligible for a refund when they file their annual tax return.

Self-Employment Contributions Act (SECA) - 26 U.S.C. § 1401 et seq.
This statute is relevant because it imposes payroll tax obligations on self-employed individuals.

The Self-Employment Contributions Act (SECA) requires self-employed individuals to pay both the employee and employer portions of the Social Security and Medicare taxes, similar to FICA taxes for employees. The self-employment tax rate is 15.3%, which includes 12.4% for Social Security on income up to the taxable maximum and 2.9% for Medicare on all net earnings. Like FICA, there is an Additional Medicare Tax of 0.9% on earnings above a certain threshold. Self-employed individuals calculate their self-employment tax using Schedule SE (Form 1040) and may deduct the employer-equivalent portion of the tax when computing their adjusted gross income. This tax is paid through estimated tax payments during the year or when filing their annual tax return.

Federal Unemployment Tax Act (FUTA) - 26 U.S.C. § 3301 et seq.
This statute is relevant because it imposes a payroll tax on employers to fund state workforce agencies and unemployment insurance.

The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax that provides funds to state unemployment agencies. The FUTA tax rate is 6.0% on the first $7,000 of income paid to each employee annually. However, employers who pay their state unemployment taxes on time and in full may receive a credit of up to 5.4% against the FUTA tax, effectively reducing their federal tax rate to 0.6%. FUTA taxes are paid quarterly and are solely an employer's responsibility; no portion of the FUTA tax is deducted from the employee's wages. The funds collected are used to pay unemployment compensation to workers who have lost their jobs.