Payroll Taxes: Where They Actually Go  

If you are receiving a pay cheque for your job, you might have realized that your employer’s payroll department deducts certain taxes from each cheque. But what are those taxes and where do they go? Instead of contacting your payroll service, we’ll go over what payroll taxes are and where they actually go.  

What are these deductions from my payroll and where is that money going?  

Short of asking a payroll service, a paystub may be difficult to interpret and doesn’t give you a lot of detail on what is actually being deducted and where it is going. The three most basic payroll service deductions are income taxes (depending on the state you are employed in), Medicare, and Social Security. Also, depending on the state, you may have a payroll deduction to help fund unemployment (Alaska, New Jersey, and Pennsylvania currently).  

Social Security payroll taxes are withdrawn 

The basic idea behind both Medicare and Social Security payroll taxes are that your payroll service withdraws them from your paycheck while you are employed and places they into a fund for when you are no longer employed. Medicare payroll deductions go into two funds – the Hospital Insurance Trust Fund (which pays for Medicare Part A and certain fees/administrative costs) and the Supplementary Medical Insurance Trust Fund (which pays for Medicare Part B and certain fees/administrative costs).  

Taxes service rates can change 

The rates you are being taxed at can change depending on what’s going on but they currently stand at about 1.45% for Medicare. Social Security payroll service deductions go into two funds as well – Old-Age and Survivors Insurance Trust Fund (which pays retirement and survivor benefits) and the Disability Insurance Trust Fund (which pays for disability benefits). The current rate is 6% for Social Security. Also, everyone is required to pay federal income tax, which is paid directly into the federal treasury. State income tax, depending on the state you are employed in, is also included but goes into your state treasury.  

Deductions reach the right places. 

Your employer’s payroll outsourcing service will manage making sure all of those deductions reach the right places. If you have chosen a 401K retirement plan, that money will also be deducted directly from your pre-tax income by your work’s payroll service.   

What does your employer pay?  

Employer payroll service is only responsible for a certain amount of your payroll deductions.  Generally, your employer is required to pay into unemployment, which you’re allowed to draw back out of in the event that you are let go from your job. As noted above, three states do require employees to pay into it on their own instead of relying on their employer’s payroll outsourcing service. Those rates may vary, check with your payroll service for the most accurate information. If you’re not sure what your employer is paying, contact your human resources department for more information.  

There are many funds and deductions that come out of your paycheck, no matter how frequently you are paid. It’s important to know what these deductions are and what they are funding. Please check out payrollserviceaustralia.com.au for additional links and resources.  

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