Everyone in the United States who receives a paycheck, irrespective of what their job may be, is required by federal law to contribute to payroll taxes. Certain amounts of these taxes are the responsibility of the employee, and others are paid by the employer.
Your company is required by law to submit payroll taxes to the government. If taxes are paid late, incorrectly paid, or just not paid at all, your business can be faced with harsh penalties and accrue thousands of dollars in interest on unpaid taxes.
Read on to learn more about payroll taxes, including what taxes the employer pays and how to calculate what’s owed.
Payroll Tax Defined: What is Payroll Tax?
Simply put, payroll taxes are an amount of money that is paid to the Internal Revenue Service (IRS) – and to states and local entities that collect income tax – based on the wages of employees. Employers withhold a percentage of an employee’s wages for payroll taxes, and in many cases, match the amount themselves. These taxes are required by federal, state, and sometimes local governments, depending on the jurisdiction.
What’s the Purpose of Payroll Tax?
Payroll taxes are used to finance two government-run programs: Social Security and Medicare. These social insurance taxes make up 24.8% of combined federal, state, and local government revenue, and they’re the second-largest source of government revenue in the United States. Federal income tax takes first place. In addition, payroll taxes contribute to state-level unemployment insurance and other local initiatives.
Employee vs. Employer Payroll Taxes
Employee payroll taxes are amounts withheld directly from an employee’s paycheck by the employer. These deductions typically include Social Security, Medicare, and federal and state income taxes, depending on local laws.
Income tax is calculated based on the most recent Form W-4 an employee has filled out. Employees can use a tax withholding estimator to help determine this amount. The IRS publishes annual tables to determine the amount of tax to be withheld from each employee’s paycheck. The percentage is dependent on the employee’s gross wages, filing status, and the number of exemptions listed on the W-4.
On the other hand, employer payroll taxes are paid separately by the employer and are not deducted from employee wages. Employers match the employee’s contributions for Social Security and Medicare and also pay additional taxes, such as federal and state unemployment insurance taxes. These taxes are an employer’s obligation to support public programs without directly reducing employee earnings.
How Do Payroll Taxes Work?
The payroll tax process begins with employers withholding the required amounts from employee wages during each pay period. At the same time, employers calculate their own payroll tax obligations, which include matching Social Security and Medicare contributions and paying additional taxes, like unemployment insurance.
Employers then deposit the combined employee withholdings and their own contributions to the IRS and other relevant tax agencies on a regular schedule, often semi-weekly or monthly depending on the size of the payroll. These payments are accompanied by detailed reports, such as IRS Form 941, which summarize tax liabilities and payments. This process ensures compliance and funds essential public programs.
How Much Are Employer Payroll Taxes?
The amount an employer pays in payroll taxes depends on the number of the employees in the company and the wages those employees earn. Employers pay:
- 6.2% of each employees’ taxable wages up to $176,100 for Social Security
- 1.45% of each employees’ taxable wages for Medicare
- 6% of the first $7,000 of employee wages for federal unemployment tax (FUTA)
- State unemployment taxes, determined by the state
Additional payroll taxes may apply in certain states or for specific programs, such as paid family leave or disability insurance. Employers must calculate these amounts carefully and adhere to their deposit schedules to remain compliant.
How to Calculate Payroll Tax
Federal Insurance Contributions Act (FICA) taxes (Social Security and Medicare) and unemployment taxes are relatively standard and, therefore, easier to calculate. Federal and state income taxes can be a bit more of a challenge.
Form W-4 determines the amount of federal income tax that is withheld from a paycheck. This form shows employees’ filing statuses and the number of exemptions they claim. IRS Publication 15B, Employer’s Tax Guide, in Section 17: How to Use the Income Tax Withholding Table, indicates how much tax to withhold from each employee. This tax table is updated annually by the IRS, so it’s important to keep on top of things.
A similar tax table is produced annually by each state. As an example: if your employees work in Georgia, you can download the Georgia Income Tax Tables to determine precisely how much state income tax to withhold from your employees’ paychecks.
Add up federal income tax, state income tax, FICA taxes, and any other deductions to arrive at the total payroll tax withholding.
What Payroll Taxes Do Employers Pay?
Employers pay the following taxes:
FICA Tax
FICA taxes include Medicare and Social Security.
- Medicare is a 2.9% payroll tax that is split equally between employer and employee. Employees and employers will each pay 1.45% Medicare tax. The Affordable Care Act (ACA) added a provision wherein highly compensated employee must pay an additional 0.9% Medicare tax. The threshold annual compensation amounts that trigger the additional tax are:
- $250,000 for married taxpayers who file jointly
- $125,000 for married taxpayers who file separately
- $200,000 for single and all other taxpayers
- Social Security is a 12.4% payroll tax. For 2025, the Social Security tax will be paid on the first $176,100 of wages, a $7,500 increase from the previous year. Half of these payroll taxes (6.2%) are directly remitted to the IRS by employers, while the other half is taken out of workers’ paychecks.
FUTA
This 6% federal payroll tax is solely paid by the employer. Employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. This credit is lower in “Credit Reduction States” where the state has not repaid money it borrowed from the federal government to pay unemployment benefits.
State Unemployment Tax
Each state administers its own unemployment insurance program within guidelines established by federal law. Three states – Arkansas, New Jersey, and Pennsylvania – require minimal employee contributions in certain situations.
What are Payroll Taxes Used For?
Payroll taxes fund critical programs like Medicare, Social Security, and unemployment insurance, which provide financial support and healthcare for workers and retirees.
The following chart shows employee and employer tax contributions, as well as where the payroll taxes go.
| Employer | Employee | Total | Income Cap | What They Pay For | |
| Social Security | 6.2% | 6.2% | 12.4% | $176,100 | 85 cents of every dollar goes into an account that pays benefits to retirees and surviving spouses and children of employees who have died. The other 15 cents is put into an account that pays benefits to people with disabilities. |
| Medicare | 1.45% | 1.45% | 2.9% | No Limit* | Goes into an account that pays for some healthcare costs for Medicare recipients. |
| State Unemployment | Variable | None | Variable | Variable | Paid to participating state workforce agencies to pay unemployment benefits. State laws determine these tax rates. |
| Federal Unemployment | 6.0%* | None | 6.0% | $7,000 | Covers the cost of managing the Unemployment Insurance and Job Service programs in every state. |
*If you pay into state unemployment funds, you may receive a credit of up to 5.4% of federal unemployment taxable wages.
Payroll Tax Non-Compliance Penalties
The percentage rate charged for a penalty depends on how late your payroll tax deposit is received. For late amounts or deposits that aren’t properly prepared, the penalty rates are:
- 2% of unpaid deposit for deposits 1–5 days late
- 5% of unpaid deposit for deposits 6–15 days late
- 10% of unpaid deposit for deposits greater than 15 days late
- 15% of unpaid deposit for all amounts that remain unpaid more than 10 days after the date of the first notice, or the day on which the taxpayer received a demand for immediate payment, whichever is earlier
Common Payroll Tax Mistakes
Common payroll tax mistakes to avoid include the following:
Misclassifying workers: Employee vs. independent contractor misclassification can lead to significant tax penalties. To prevent this, carefully review the IRS criteria for worker classification.
Late tax deposits and filings: As established above, missing deposit deadlines or filing due dates incurs penalties. To stay on top of these important deadlines, implement a tax calendar with automated reminders. Set up electronic payment systems and schedule deposits in advance.
Incorrect tax calculations: Mathematical errors in tax withholding calculations create compliance issues. Use updated payroll software that automatically calculates taxes. Regularly verify tax tables are current. Have a second person review calculations, especially for special circumstances like bonuses or termination pay.
Poor recordkeeping: Inadequate documentation makes it difficult to defend against audits. Maintain organized digital and physical files of all payroll records, including timesheets, tax forms, and payment records.
Missing state/local tax requirements: Ensure you don’t overlook state and local tax obligations, especially for remote workers. Research tax requirements for each jurisdiction where employees work. Consider using a payroll service provider familiar with multi-state requirements. Register with appropriate agencies and set up proper withholding.
Common Payroll Taxes FAQs
Still have questions regarding payroll taxes? Read on for some answers to the most common queries.
How Often Do I Have to File Taxes?
Most employers must file Form 941 quarterly to report federal income tax withholding, Social Security, and Medicare taxes. Additionally, Form 940 for federal unemployment tax is filed annually. State filing frequencies vary based on your tax liability and state requirements.
Is Payroll Tax State or Federal?
Both! Federal taxes include Social Security, Medicare, and federal unemployment. State taxes typically include state unemployment insurance (SUI) and, in some states, additional payroll taxes like disability insurance. Some localities also impose payroll taxes.
What Payroll Taxes Do I Pay for Independent Contractors?
Independent contractors are responsible for self-employment taxes, so there are no employer taxes to pay.
How Do I Pay my Payroll Taxes?
Federal tax deposits must be made by electronic funds transfer either directly from a business tax account, via Direct Pay, or through the Electronic Federal Tax Payment System. Learn more about how to pay payroll taxes.
How Paycor Helps with Payroll Taxes
Overseeing the payment of payroll taxes can be extremely overwhelming. If you’re a small business owner with only a handful of employees, the process can be manageable. But, it can also be fraught with uncertainty. A single mistake in calculations could end up costing you thousands. If you work for a larger company with many employees, managing payroll on your own with spreadsheets or disparate systems is simply untenable.
With a payroll provider, you won’t have to worry about submission guidelines, accuracy of payment, or getting your payroll taxes paid on time. We will take care of it for you, saving you the hassle and anxiety every time payroll rolls around.
Looking for a hassle-free way to manage payroll and tax compliance? Paycor got its start in the Midwest, learning to manage the complexities of the nation’s most challenging regulatory environment. For nearly 30 years, we’ve led the way in keeping SMB clients compliant, and it all starts with our payroll software.
Download our free 2025 calendar of important HR dates designed to help you stay on top of payroll and tax compliance.
NOTE: This information is meant to be a general article about how payroll taxes largely work. This article is not intended to serve as tax or legal guidance for your business. For advice specific to your company, consult a tax professional.