Payroll Taxes: The Basics for Employers

Withholding Income Taxes and FICA Taxes

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Payroll taxes are taxes employers withhold from employees' pay and remit on behalf of employees and themselves to the appropriate taxing agencies. As an employer, you are expected to collect and pay these taxes through your payroll process.

Key Takeaways

  • There are several different kinds of taxes to withhold from your employee's pay, including federal income tax, Social Security taxes, and Medicare taxes.
  • Generally, you'll withhold 12.4% of your employee's pay for Social Security and 2.9% for Medicare.
  • You may also need to withhold state income taxes or other taxes, depending on where your business is, where the employee lives, and how much they earn.
  • It's important to submit these withholdings to the Internal Revenue Service (IRS) on time and to file regular reports to avoid penalties.

Payroll Tax Inclusions

U.S. federal payroll taxes include several components.

Federal Income Tax Withholding

These are taxes withheld from employee pay for federal income taxes owed by the employees. The amount of federal income tax is determined by information employees provide on the Form W-4 they complete when hired. This form can be changed by the employee at any time and as often as the employee wishes.

Social Security and Medicare

Called FICA taxes (Federal Insurance Contributions Act), this tax is shared between employees and employers. The employer deducts the employee's share, which is one-half the total due, from employee wages/salaries, and the employer pays the other half.

Additional Medicare Tax

Employers must withhold 0.9% Additional Medicare Tax on employees' earnings that exceed $200,000 ($250,000 for married taxpayers filing jointly). This Medicare tax has no employer match.

Federal Unemployment (FUTA) Tax

You'll pay this tax separately from the other taxes and it isn't withheld from employee pay.

Self-Employment Tax

This is basically Social Security and Medicare tax for self-employed individuals.

Note

Tax laws change often, so always check with the IRS or a tax professional for the most current information.

The Payroll Tax Process

To start the the payroll tax process, you'll first calculate the gross pay for an employee. Then, based on their gross pay, you'll deduct a specific amount for federal income tax, based on the W-4 form the employee has completed most recently. You'll also deduct a specific amount for FICA taxes. 

Employers are required to deposit federal income tax and Social Security and Medicare taxes with the IRS monthly or semi-weekly. Determine the schedule before the beginning of the tax year. FUTA tax deposits are due for the quarter of the year the tax due exceeds $500.

The IRS provides an Income Tax Withholding Assistant to help determine how much tax you need to withhold and report as an employer.

FICA Tax Withholding Rates

The employee tax rate for Social Security is 6.2%. The employer tax rate for Social Security is also 6.2%, or 12.4% total. The Social Security portion of the tax is capped each year at the maximum wage subject to Social Security, which is $147,000 for tax year 2022.

The employee tax rate for Medicare is 1.45% and the employer tax rate for Medicare tax is also 1.45%, or 2.9% total.

The Additional Medicare tax of 0.09% is withheld on income above $200,000 each. There is no employer match for this tax.

State Payroll Taxes

State payroll tax varies from state to state. Most states, but not all, collect tax on income. Some don't collect tax on wages but do collect on other forms of income, such as investment dividends. In addition, some states withhold additional payroll taxes for:

  • State unemployment tax funds
  • State disability funds
  • State worker's compensation funds

State payroll taxes apply to your business depending on where your employees work.

Note

Check with your state's tax agency for details on what types of income are taxed and how to collect and remit payroll taxes.

How Employers Pay Payroll Taxes

After you have calculated the amounts for federal income tax withholding and FICA taxes and withheld these amounts from employee paychecks, you must: 

  • Calculate the amount you, as a business, must pay for FICA taxes, and set aside those amounts
  • Make payments to the IRS either monthly or semi-weekly, based on the size of your total employee payroll
  • Report payroll taxes quarterly using Form 941 or through E-File

Reports and deposits are due by specific dates, and if you do not remit payroll taxes or send them in late, your company could be subject to monetary fines. These start at 2% of the past-due amount for payments up to five days late. The penalty increases, up to 15% if the company is past 10 days of non-payment and the IRS has had to send out a payment notice.

Frequently Asked Questions (FAQs)

How much are payroll taxes?

Generally, you'll set aside 15.3% of an employee's wages per pay period for FICA taxes, plus 0.9% Additional Medicare Tax if their income is over $200,000. You may also need to withhold federal income tax, state and local income taxes, and federal and state unemployment taxes. Those amounts vary by employee.

How do I pay my employee's payroll taxes?

Once you have set aside the tax withholdings, you'll need to make deposits with the IRS. You must make these deposits via electronic funds transfer by the due date. If you're late, you'll owe penalties of up to 15%. You'll also need to file the proper form with the IRS.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Topic No. 560 Additional Medicare Tax."

  2. IRS. "Understanding Employment Taxes."

  3. IRS. "Depositing and Reporting Employment Taxes."

  4. IRS. "Topic No. 751 Social Security and Medicare Withholding Rates."

  5. Squareup. "Payroll Taxes in 2020: Federal & State Tax Information."

  6. IRS. "Employment Tax Due Dates."

  7. IRS. "Failure To Deposit Penalty."

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