Payroll taxes are taxes withheld from an employee’s paycheck.
Although many people consider payroll taxes to include federal, state, and local income tax, they technically don’t. Instead, the money collected from payroll taxes goes straight toward federal programs: Social Security, Medicare, and unemployment.
However, because income taxes are also withheld from employees’ paychecks, they often get lumped into payroll taxes.
Employers must pay payroll taxes monthly or semi-weekly and report them quarterly or annually, depending on how high their tax responsibility is.
This guide breaks down what’s included in payroll taxes and how employers collect and pay them.
Federal Payroll Tax Obligations
Payroll services generally handle payroll taxes, including calculating how much should be taken from an employee’s paycheck and detailing how much an employer owes in payroll taxes during each period. Some may even fill out the necessary payroll forms an employer needs to file.
Still, every employer should understand how payroll taxes work. Payroll taxes have multiple parts, and it’s crucial to get each one right to meet tax requirements.
Additionally, most employers are responsible for making payroll tax deposits semi-weekly or monthly. Employers can use IRS Publication 15 to determine whether they must deposit payroll taxes semi-weekly or monthly.
Monthly depositors must make all deposits for the current month by the 15th of the next month. Semi-weekly depositors pay on Wednesdays or Fridays following a pay week, depending on what day they pay employees.
Most employers must then report payroll taxes by quarterly due dates using Form 941. Small employers with a payroll tax liability of less than $1,000 may get approval from the IRS to file annually with Form 944.
The following components make up the payroll taxes to be withheld from each paycheck.
Social Security tax helps fund federal Social Security programs that offer financial assistance to people in retirement and people living with disabilities.
In 2023, the Social Security portion of payroll taxes equals 12.4% of an employee’s gross wages. However, both the employer and employee split that cost, leaving them each with a 6.2% responsibility.
So, if an employee earned $1,000 in gross wages, their total Social Security responsibility for that paycheck would equal $124. Therefore, the employer and the employee each pay $62 for that pay period. The employee only gets their portion of $62 deducted from their paycheck.
Medicare tax supports the federal Medicare program, which provides health insurance to people 65 or older and other people with specific health conditions or disabilities.
Medicare tax is 2.9% of an employee’s gross wages up to $200,000. Any amount over $200,000 gets taxed at 0.9%. This is known as Additional Medicare Tax.
Again, employers and employees split the 2.9%, making them each responsible for 1.45%.
Let’s say an employee makes $250,000 a year. Their first $200,000 is subject to the 2.9% tax, or $5,800. The remaining $50,000 gets taxed at 0.9%, or $450. The total responsibility for Medicare taxes for this employee’s wages is $6,250 for the year.
Because the employer and employee split this amount, the employee pays $3,125. If they get paid biweekly with 26 paychecks, they’ll have about $120 withheld from each paycheck for Medicare taxes.
FICA is short for Federal Insurance Contributions Act. It incorporates both Social Security and Medicare taxes. Employee paychecks typically list this acronym as part of their taxes withheld rather than listing Social Security and Medicare taxes separately.
In total, FICA tax equals 15.3% of an employee’s gross wages, but an employer and employee are each responsible for paying half, or 7.65%, of FICA taxes.
As an example, an employee with a $1,000 paycheck pays $76.50 for their portion of FICA taxes, while the employer pays the other $76.50 to meet the required total of $153.
FUTA is the acronym for Federal Unemployment Tax Act. FUTA taxes help fund unemployment programs that provide financial assistance to workers who lose or are laid off from their jobs.
This tax does not show up on employee paychecks because it isn’t withheld from their wages. Instead, an employer pays the full amount of FUTA tax, which is calculated at 6% of an employee’s first $7,000 in annual wages.
Therefore, an employee earning $100,000 a year only has $7,000 counted toward the employer’s FUTA tax responsibility. Their employer pays just 6% of $7,000, or $420, for the year.
If an employee earns less than $7,000 for the year, their employer pays 6% of their total income. So, an employer pays $300 in FUTA taxes for an employee making $5,000.
State Payroll Tax Obligations
Because states can set their own laws regarding employment, state payroll laws vary, just like PTO laws in each state. Depending on the state’s regulations about PTO, workers’ compensation, income tax, and unemployment tax, payroll tax can look a lot different among states.
SUTA is the State Unemployment Tax Act, which governs state requirements for unemployment payroll taxes to support each state’s unemployment program.
As I mentioned before, under FUTA, only employers pay the unemployment portion of payroll taxes. However, three states—Alaska, New Jersey, and Pennsylvania—require employees to contribute a portion of the tax, too, as part of SUTA.
New employers and established employers have different SUTA tax rates in each state. The state assigns rates to established employers within a specific range. I’ll refer only to new employer SUTA rates in this section to keep things simple.
In New Jersey, for example, new employers pay 3.1%, and employees pay 0.425%. In Nebraska, new employers pay 0.34%, while employees pay nothing toward SUTA.
Like FUTA tax, each state sets its own wage base for calculating SUTA tax. Wage base is the amount of wages the employer and/or employee is responsible for paying SUTA tax on.
For example, Alabama’s wage base is $8,000, so employers only pay SUTA tax on an employee’s first $8,000 in wages.
Some states also have an income tax, while others don’t. Alaska, Florida, and Texas are three states without an income tax.
If you have employees from different states, you can probably see that paying payroll taxes can get tricky. Employers are responsible for meeting tax requirements for the state their employee lives in, not where the business operates.
Let’s look at how two employees’ payroll taxes might look different if they’re from different states. We’ll assume one employee is from Colorado while the other is from Florida, and both earn $50,000 a year.
FICA taxes are federal, so they don’t vary between states. The total FICA obligation for each employee is $7,650 for the year, with each employee and their employer paying half, or $3,825.
The employer must also pay the FUTA tax of 6% on their first $7,000, or $420 per employee.
Now, Colorado’s wage base is $20,400, with a SUTA rate for new employers of 1.7%. Florida’s wage base is $7,000, with a new employer SUTA rate of 2.7%. The employees each earned over their state’s wage base.
Therefore, the employer must pay $346.80 for the Colorado employee and $189 for the Florida employee. That makes the total federal and state taxes the employer is responsible for $4,591.80 for the Colorado employee and $4,434 for the Florida employee.
Keep in mind that other factors like PTO can affect gross wages, which would then change these calculations because they’re based on how much an employee earns.
Local Payroll Tax Obligations
In addition to federal and state payroll taxes, businesses may have to comply with local payroll taxes if their counties or cities impose them. Usually, localities refer to these as income taxes rather than payroll taxes.
For example, Detroit, Michigan imposes a 2.4% tax rate on its residents’ income. A person earning $40,000 a year would need $960 withheld by their employer.
St. Louis, Missouri, also charges an income tax of 1%. The same employee earning $40,000 per year would have $400 withheld for the entire year for local income tax.
In most cases, businesses have to withhold local taxes based on where an employee lives, similar to state payroll taxes. In other words, an employer in Texas with an employee in Detroit would withhold Detroit income tax from the employee’s paycheck and send that money to Detroit according to its pay schedule.
Localities typically require businesses to make quarterly payments of local payroll taxes and file their returns by April 15th of the following year.
However, quarterly tax payment dates vary by locality. Although many, like Detroit, align with federal tax dates in April, June, September, and January, others set varying dates. For example, St. Louis’s income tax payments are due in April, July, October, and January.
Stay Up to Date With Payroll Tax
Keeping current with payroll taxes is non-negotiable. The IRS can charge a penalty fee beginning as soon as one calendar day past the due date. Penalties 2% to 10% of your unpaid deposit, and interest can be charged on top of your penalty.
States and localities can also charge their own penalties if you’re late paying those taxes.
In short, not paying payroll taxes correctly or on time can get expensive quickly.
The best way to keep your business on track is to use a payroll service that makes the right calculations and sends reminders of upcoming payment dates. Top solutions can even make deposits and file forms on your company’s behalf to keep you up to date.