Fall is here in Michigan. Pumpkins are on porches and the air feels crisper, cooler, and filled with the scents of autumn. As the days get shorter and colder, spring feels like a long way off, and with it, the promise of a large tax return. But it’s never too early to examine where your payroll taxes go and what they’re used for.
Personally, I feel a bit better when I understand what my federal, state, and local taxes are funding, even if I still feel a little grinchy towards the deductions. And I would bet you feel similarly. Let’s take a look at the taxes assessed to employees and the businesses they work for.
What Michigan Payroll taxes are employers and employees required to pay?
Federal Withholding Taxes
Federal income tax, allowed under the 16th Amendment, has changed drastically since it was first introduced in 1913. When it first went into effect the tax rate of 1% of a person’s income affected less than 1% of the American populace. Today, much has changed. Under The American Taxpayer Relief Act of 2012, the highest bracket was raised to 39.6%. But under the 2017 Tax Cuts and Jobs Act, the highest rate is now 37%.
What does the federal government do with the funding?
The federal taxes taken out of our paychecks funds three categories: discretionary, mandatory, and interest spending. Discretionary spending includes things like the military, education, housing, internal affairs, and more. Mandatory spending foots the bill for Social Security, Medicare, food and agriculture, and unemployment. Lastly, interest payments account for a small portion of the overall spending and help to pay down the tremendous amount of debt the United States owns.
Federal Insurance Contributions Act
The Federal Insurance Contributions Act, or FICA, was created to act as a safety net for retirees and spawned the Social Security Administration. Today employers match employee contributions of 6.2% of the paychecks.
In 1965 FICA was amended to include the Medicare and Medicaid programs. Medicare, funded by federal tax contributions, provides national health care coverage for senior citizens. Medicaid assists low-income Americans with medical coverage. It is funded by both federal and state government taxes.
What does FICA do with the funding?
Social Security payouts are by far the largest budget expenditure for the federal government. It represents nearly a quarter of the income tax revenue collected and goes towards paying disability, dependent, and retiree benefits. But the future of the program looks grim; as the Baby Boomers retire, Social Security is projected to only cover about 75% of its total obligations by 2035.
As of today’s writing, Medicare is taxed at 1.45% of all wages, and cover payments for medical expenses for retirees over the age of 65.
Michigan State and Local Withholding Taxes
The Michigan statewide income tax rate is 4.25% of an employee’s compensation after deducting personal and dependency allowances.
Local withholding taxes vary depending on which city you reside in. Residents of Detroit pay one of the highest percentages at 2.4%, followed by residents of Highland Park at 2%, and Grand Rapids at 1.5%. For in-depth Michigan tax information, go to Michigan.gov.
What does Michigan do with the funding?
A large portion of Michigan taxes, both on a state and local level, go to education, health care services, and economic development. They also help fund roads (if you can believe it) and other infrastructure projects.
What Payroll Taxes are Employers required to pay?
Federal and State Unemployment Insurance
The final mandated tax is employment insurance taxes. Federal unemployment tax, known as FUTA, is 6% of every employee’s first $7,000 in earnings and is paid to the federal government. Federal unemployment tax is NOT taken out of an employee’s paycheck.
In Michigan, determining the amount an employer pays to the Michigan Unemployment Insurance Agency is a complicated affair. To find accurate employer tax information, check out Michigan.gov/uia.
It’s always a bit disheartening to see chunks of our paychecks eaten up by taxes, whether you’re an employee or an employer. But by understanding what they fund and how they help our fellow citizens, tax deductions become a slightly less bitter pill to swallow.