There are several different types of payroll taxes. Most employees or self-employed individuals pay taxes, either directly withheld through a payroll deduction or when filing their personal income tax return.
Types Of Payroll Taxes
Payroll taxes may include:
- State income tax
- State disability tax (if applicable)
- Federal income tax
- Social Security taxes*
- Medicare taxes*
- *Social Security & Medicare taxes are often referred to as FICA for W-2 employees and SECA for self-employed individuals. The difference between the two is that an employee and employer split the FICA tax, but a self-employed individual is responsible for the entire SECA tax liability.
That long list of payroll taxes doesn’t even include sales tax, property taxes, and other taxes that nonprofit or church employees, and self-employed people are responsible for. So when you are told some income is “tax-free,” a great follow-up question is, “Tax-free for which tax?”
Ministers may be under the impression that their housing allowance is tax-free. In some cases it might be, but oftentimes it is only free from income taxes, not from SECA taxes.
Employers are also responsible for paying unemployment insurance and training taxes (both state and federal), and workers’ compensation costs. Although workers’ compensation insurance is not a tax, it’s important to note that the employer pays the cost. It is not withheld from the employee’s payroll check.
There are many different ways to set up your compensation to decrease your personal tax liability, without cheating the system. One way is to make sure your employer or organization has an accountable expense reimbursement policy. If your employer does not have an accountable expense plan, and they are adding your reimbursed expenses to your gross income, then you are paying more taxes than you should. Granted, those expenses are ordinary and necessary for business. However, tax regulations prevent you from taking advantage of these business-related expenses as an employee.
Self-employed people have even more paperwork to keep track of. You must submit expenses to a contractor and hold on to the original receipts to deduct the business expenses at tax time. Many self-employed individuals don’t understand the tax ramifications of being in business for themselves, so we recommend consulting with a CPA or trusted financial advisor prior to becoming self-employed.
Good luck, and remember this blog is just a helpful resource and is not meant to be a substitute for professional services. Always consult a CPA or trusted professional if you seek tax or accounting advice.