The difference between payroll tax and estimated taxes

Taxpayers often find themselves in debt to the IRS even after paying for the entire year. This has proven to be very confusing and frustrating for many who already feel they are overpaying. In order to control these types of issues, you must first understand what constitutes these taxes and how they are calculated. Only then can you instruct your required payments in a way that produces the desired tax outcome.

If you work as a W-2 employee, you generally must remit payroll taxes. These are funds that are withheld from your check every payday. Payroll taxes, by definition, are taxes that must be paid by both the employer and the employee, and are calculated as a percentage of the income your employer pays. This tax is paid in two different ways. The first way is the funds employers must withhold from your paycheck. The money withheld is used to cover social security, Medicare, income tax and different insurance (unemployment and disability). Payroll tax deductions include the following:

• Withholding of Social Security (6.2% until reaching the annual maximum)

• Medicare (1.45%)

• Federal income (based on withholding tables, see publication 15, irs.gov.)

• Additional Medicare (0.9% for income over $ 200k)

The second way that payroll tax is paid comes directly from the employer. Employers must pay a fixed amount or proportional to an employee’s salary. These amounts are also paid to help fund social security, as well as other insurance programs, and include the same aggregate percentages paid by employees. This is how funds from the Federal Insurance Contribution Act (FICA) are paid. FICA is made up of Social Security and Medicare. The employee pays half and the employer pays half to reach 15.3% of the wage tax liability.

If you are a small business owner or work as an independent contractor, you may have to pay your Medicare and Social Security (self-employment) obligation through estimated tax payments throughout the year. The IRS states: “Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if You receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and rewards, you may have to make estimated tax payments. If you run your own business, you generally have to make estimated tax payments. Estimated taxes are used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. If you don’t pay enough taxes through withholding and estimated tax payments, you may find that you are charged a penalty estimated tax payments are late, even if you are due a refund when you file your tax return “(irs.gov., pub. 505, tax withholding and estimated tax).