Payroll Taxes Version History

The PayrollTax module simulates the employer and employee payroll taxes used to finance the Social Security and Medicare, Railroad Retirement, Civil Service Retirement System (CSRS), and Unemployment Compensation programs. PayrollTax simulates the old age and survivor (OASI), disability (DI), and health insurance (HI) portions of the Social Security tax (OASDHI) paid by employers, employees, and the self employed. PayrollTax also simulates Tier I and Tier II Railroad Retirement taxes paid by employees and employers, CSRS taxes paid by employees and employers, and unemployment insurance taxes paid by employers.

The operation of the PayrollTax module is described below in more detail. The discussion documents:

• Filing Unit
• Categorical Tax Filing Requirements
• Tax Computation
• Variables Created by PayrollTax
• Prior Versions of PayrollTax

Filing Unit

PayrollTax computes payroll taxes on a person-by-person basis, under an annual accounting period.

Categorical Tax Filing Requirements

With the exception of certain government workers, all wage and salary earners are simulated to pay OASDHI taxes. Treatment of federal and state and local government workers is described below, followed by a discussion of self employed workers and railroad employees. This section concludes with a discussion of workers subject to Unemployment Insurance taxes.

All federal government employees are subject to HI taxes. Under real-world rules, all federal employees hired after 1983 are subject to OASDI taxes in addition to HI taxes. TRIM3 approximates this rule by assigning OASDI taxes to all federal employees who were under 21 in 1983. Federal government employees who were 21 or older in 1983 are simulated to pay OASDI taxes if the value of random variable RandomNumNewFederalWorker is less than or equal to the value specified by PortionFedOASDIWkrs. Otherwise, they are simulated to pay CSRS taxes.

State and local government workers are simulated to pay OASDHI taxes if the random variable RandomNumSocialSecurityExempt is less than or equal to the value specified by PortionStateLocalOASDIWkrs. Under real-world rules, all state and local workers hired after March 31, 1986 must pay HI tax. TRIM3 approximates this rule by assigning HI taxes to all state and local workers who were under the age of 21 in 1985.

Persons with self employment earnings are checked to determine if they must pay OASI, DI, and HI taxes. Those with earnings below a certain amount are exempt from these taxes. See the discussion under "Tax Computation" for further details.

Tier I and Tier II taxes are simulated for railroad employees. Tier I taxes are simulated implicitly—following the rules used to calculate OASI, DI, and HI taxes. Tier II taxes are simulated explicitly, through a separate set of program rules.

With the exception of certain agricultural and private household workers, all persons with wage and salary earnings are simulated to be subject to Unemployment Insurance taxes. PortionAgWorkersWithUI and PortionHhWorkersWithUI specify the percentage of agricultural workers and the percentage of private household workers to be assigned to be subject to the Unemployment Insurance tax. An agricultural worker is assigned to be subject to the Unemployment Insurance tax if the value of random variable RandomNumSocialSecurityExempt is less than or equal to the value specified by PortionAgWorkersWithUI. A private household worker is assigned to be subject to the Unemployment Insurance tax if the value of random variable RandomNumSocialSecurityExempt is less than or equal to the value specified by PortionHhWorkersWithUI. Railroad employees are assigned to be subject to the Railroad Unemployment Insurance tax.

Tax Computation

The exact amount of income that is taxable, and the tax rate that is applied, varies across the payroll tax programs. TRIM3 program rules allow the user to specify separate rates and bases for the employer and employee shares of the tax, even when there is only a single shared rate and base under current law.

Table 1 shows the program rules containing the bases and rates used for simulating OASI, DI, and HI taxes. TRIM3 calculates OASI, DI, and HI employer and employee taxes separately using the relevant bases and rates specified through the program rules shown below. For example, in calculating the employer portion of the OASI tax, TRIM3 sets taxable earnings equal to the smaller of the worker’s earnings and the earnings base specified through OASIEmployerBase. Taxable earnings are then multiplied by the rate specified through OASIEmployerRate to calculate the employer portion of the OASI tax. Once the employer portions of OASI, DI, and HI taxes are calculated, they are summed together to calculate the total employer share of the OASDHI payroll tax. Similarly, the employee portions of OASI, DI, and HI are calculated separately and then summed together to calculate the total employee share of the OASDHI payroll tax.

OASI, DI, and HI taxes must be paid on self employment earnings if these earnings exceed a certain threshold. Self employment earnings are first reduced by the percentage specified by SelfEmpEarnReductionFract (to reflect the fact that employees do not pay taxes on the value of the employer’s OASDHI taxes). Persons whose adjusted self employment earnings are less than the amount specified by SelfEmpMinTaxableEarnings are exempt from OASDHI taxes on their self employment earnings. If adjusted self employment earnings are greater than or equal to the amount specified by SelfEmpMinTaxableEarnings, then OASI, DI, and HI taxes are calculated by applying the relevant base and rate to the adjusted self employment earnings. For self employed persons who are also fully covered by OASDHI (or Railroad Retirement) as an employee, the earnings bases used in calculating self employment OASI, DI, and HI taxes are reduced by the amount of the person’s wage and salary earnings.

Table 1: OASDHI Program Rules

Employer and employee CSRS contributions are calculated for federal government employees simulated to be covered by the Civil Service Retirement and Disability Fund. FedEmployeeBase, FedEmployerBase, FedEmployeeRate and FedEmployerRate specify the employee and employer earnings bases and rates used in the calculation. The employer rate for postal workers is specified through FedEmpPostalRate.

Railroad employees are covered by Tier 1 and Tier 2 of the Railroad Retirement Fund. Tier 1 taxes are calculated implicitly through the assignment of OASDHI employer and employee payroll taxes. The employer and employee shares of Tier 2 taxes are calculated using the bases and rates specified in RrrTier2EmployeeBase, RrrTier2EmployerBase, RrrTier2EmployeeRate, and RrrTier2EmployerRate.

TRIM3 roughly imputes the unemployment insurance taxes paid by employers for workers simulated to be covered. The simulation is rough for two reasons: 1) TRIM3 does not capture firm-level variation in unemployment insurance tax rates; and 2) the rates used in the baseline simulations have been infrequently updated and often pertain to a prior year. For these reasons, TRIM3 generated unemployment insurance taxes should be interpreted with caution.

The unemployment insurance tax consists of a federal and a state component. FedUIWageBase specifies the maximum taxable earnings for the federal portion of the UI tax. The federal component of the UI tax is calculated by multiplying the tax rate specified by FedUITaxRate by the lesser of the worker’s earnings and the amount specified by FedUIWageBase. StateUIWageBase specifies the maximum taxable earnings for the state portion of the UI tax, by state. In reality, the state component of the UI tax varies by firm. Since TRIM3 does not have access to firm-level data, industry averages for each state are used. Industry averages are specified through StateUITaxRateAgric (agriculture), StateUITaxRateConstr (construction), StateUITaxRateFinance (finance, insurance, and real estate), StateUITaxRateLocalv (local government), StateUITaxRateManuf (manufacturing), StateUITaxRateMining (mining), StateUITaxRateRetail (retail trade), StateUITaxRateService (services), StateUITaxrateStatev (state government), StateUITaxRateTrans (transportation, communication, and public utilities), and StateUITaxRateWholesale (wholesale trade). For many years, TRIM3 does not have average tax rates that vary by industry. For these years, each industry-level program rule shows the average tax rate for the state. In some years, the federal government imposed an additional penalty on certain states. The tax rate specified by PenaltyUITaxRate for an employee’s state is multiplied by the employee’s federal taxable earnings to calculate the penalty portion of the Unemployment Insurance tax.

For railroad employees, TRIM3 calculates the employer’s Railroad Unemployment Insurance tax. RrrUIWageBase specifies the maximum taxable earnings for the Railroad Unemployment Insurance tax. The tax is calculated by multiplying the tax rate specified by RrrUITaxRate by the lesser of the worker’s earnings and the amount specified by RrrUIWageBase.

Variables Created by Payroll Tax

The PayrollTax module automatically creates result variables for each of the payroll tax programs. Separate amounts are kept for employer and employee contributions and for a person’s self-employment and employee OASDHI tax payments. PayrollTax output variables are listed in Table 2.

Table 2: Standard Result Variables created by PayrollTax

Prior Versions of Payroll Tax

This documentation reflects the PayrollTax module’s capabilities effective with the version of "forms" used in the revised 2003 PayrollTax baseline (PT2003_v2). For a history of changes to the PayrollTax module, click here.