4

Or are they applied in sequence? (and if they are, what order are they applied in?)

As an example, if an American individual makes $100,000.00 in wages in 2020, and that is their only income, are they paying:

A.
$6,200.00 in OASDI tax.
$1,450.00 in Medicare tax.
$18,079.50 in Federal Income tax.

where all three are applied based on the same initial wage value, or...

B.
$6,200.00 in OASDI tax.
$1,360.10 in Medicare tax.
$16,265.08 in Federal Income tax.

where one tax is deducted from the taxable amount before another is assessed. If this is the case, the values of course would vary based on the order they are assessed in.

I would have thought this would be an easy Google to solve, but I'm having a difficultly finding a clear answer. Would appreciate if anyone here knows :)

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  • 2
    It may be helpful to remember that when your employer withholds some tax from your paycheck, it is functionally no different than if you received those funds and paid them to the government yourself. All of the funds withheld to your paycheck were still paid to you, you just used them to pay taxes that you are presumed to owe with your employer taking care of the logistics. May 1 '20 at 20:35
  • That's a good way to describe it @DavidSchwartz
    – jpm
    Dec 25 '20 at 5:05
9

NO, all these taxes are computed separately on the 'base' wages reported on W-2.

Your figures for employee SS and Medicare taxes are correct, but Federal income tax is wrong. Federal income tax is computed using gross income including wages less some adjustments and deductions which can vary and usually depend on filing status, and then subtracting some credits which can vary. If a single person (who does not have a dependent child that qualifies for head-of-household status, and is not a recent widow/er permitted to file MFJ) with $100k wages takes the standard deduction for 2020 ($12400) and receives no credits, their tax will be $15103.50. For other status or if they have 'adjustments' (like a trad IRA and/or 'self'=nonpayroll contributions to an HSA, student loan interest, or alimony for most divorces before 2019) or itemized deductions that exceed the standard deduction (which is less common since TCJA) or credit(s), then the income tax will be different.

Note the employer also pays an equal amount of SS and Medicare tax on the same base. Because the employer considers that part of the cost of hiring you, even though it doesn't appear on W-2 and you don't even report it much less actually receive it, it could be considered stacked economically: the employer is spending $107750 of which they directly pay $7750 to the government, withhold another $7750 and pay it on your behalf, and withhold an estimated amount for income tax and pay that on your behalf. You actually receive ('take home') the remainder. If the withheld amounts for income tax prove to be more than needed when you file your 1040 the following spring, you get the excess back as a refund. (And if it's too little, you have to pay the difference; if it's much too little, you may have to pay a penalty also. If you file a correct W-4, and the employer doesn't massively screw up, that normally won't happen.)

In some cases, especially upper-middle-class like this, the employer also provides health insurance at no (visible) cost to you, but it adds to their compensation expense. And if you have a 401(k) or similar plan (see below), the employer often matches your contributions, or some of them, which also adds to their cost, but does not appear in your reported wages and does not affect your taxes. (Until you retire, when you will have more income and correspondingly more tax.)

But the 'simple' case above is changed the employer offers, and the employee uses, certain tax-advantaged benefits. In particular, a 401(k) plan (or possibly an alternative like 'SIMPLE') would be fairly common for someone earning that much in wages. In this case elective deferrals by the employee are excluded from the income subject to income tax, but not for SS and Medicare. Thus with a 5% deferral, a reasonably common election, SS and Medicare tax are still computed on $100k but income tax is computed on $95k -- less the adjustments, deductions, and credits as above. In contrast employer (not 'self') HSA contributions are excluded from both SS and Medicare, AND income tax.

1
  • This is a fantastic answer, thanks for coloring in the details. And you’re right, I forgot the Standard deduction calculating federal income tax in the example. I was interested if the amount withheld for payroll tax was still considered taxable income for an employee, even though it never reaches them. It’s surprising that it is.
    – jpm
    May 1 '20 at 13:11
0

The percentage is calculated by how much an employer pays the employee. Do note that as income increases different taxes have different rules:

Social Security has a wage base limit for 2020 of $137,700. So salary above that amount doesn't need to contribute.

There's no wage base limit for Medicare tax. All covered wages are subject to Medicare tax. If in 2020 you make more than $200,000, Medicare gets an extra 0.9% on those wages above the $200K threshold.

If you are trying to find the IRS documentation, see:

Topic No. 751 Social Security and Medicare Withholding Rates

Federal Income tax is on what was earn, where the actual amount due to the IRS will depend on how that individual's taxes were resolved to due to credits, deductions, etc.

Individual states will have their own rules/tables for state income tax and state unemployment insurance costs.

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  • 1
    Everything you wrote is correct, I am mostly wondering if the employee payroll taxes withheld are considered taxable wages when calculating taxable income for federal income tax.
    – jpm
    May 1 '20 at 13:17

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