Payroll taxes are taxes paid on wages or salaries that employees earn. Payroll taxes are paid by both employers and employees.
What’s the main difference between payroll taxes paid by employers vs. employees?
Even though payroll taxes are paid by both employers and employees, there’s one major difference. Taxes that employees pay is actually subtracted out of an employee’s gross pay, which lowers the net pay for that paycheck. (Here’s a quick refresher on the difference between gross pay and net pay.)
Payroll taxes paid by the employer, however, do not affect an employee’s net pay. So if you see “employer taxes” listed on a paycheck (like the sample below), those taxes don’t affect the employee’s final paycheck.
Here’s a full summary of the taxes employers pay, employees pay, and both pay:
Payroll taxes that both employers and employees pay
Both employers and employees pay FICA tax, which is Social Security and Medicare Taxes.
- Social Security tax
You and your employees contribute to it at a rate of 6.2 percent of your employees’ gross wages. This has a wage base of $127,200 in 2017, so if your employee makes over that amount in a year, the contributions will end once they hit that limit.
- Medicare tax
You and your employees contribute to it at a rate of 1.45 percent of their gross wages. People who make over $200,000 also contribute an additional 0.9 percent after they hit that limit.
Payroll taxes only employers have to pay
Here are the taxes only employers, not employees, pay when it comes to payroll:
- Federal unemployment taxes (FUTA)
The Federal Unemployment Tax Act, or FUTA for short, is there to provide a buffer for people who have recently lost their jobs. Employers have to pay 6 percent toward FUTA, and companies who pay their state unemployment taxes on time can receive a credit up to 5.4 percent towards their FUTA tax rate. After all is said and done, the FUTA tax rate equals 0.6 percent of all taxable wages — up to the first $7,000 earned for each employee. Current states subject to a FUTA credit reduction can be found at the US Department of Labor.
- State unemployment taxes
Just like FUTA, state unemployment insurance (SUI) taxes are paid by employers as a safety net for people who are looking for a new gig. Nearly every state has a different tax rate, which is usually determined by the type of business you have and your history with unemployment claims. Head over to the US Department of Labor’s state law website to learn more about your particular rate. If are you are based in Alaska, New Jersey, or Pennsylvania, you also withhold an employee contribution of SUI taxes.
- Any local taxes
There are also a grab bag of taxes out there that are based on the city, county, or municipality that you work in. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site.at the city, county, or municipality level that the employer is responsible for.
Taxes only your employees have to pay
You guessed it, here are the taxes that only employees pay:
- Federal income tax
This tax is paid by employees only and is calculated off of their total income, filing status, and personal exemptions. Excluding any deductions, the minimum federal tax rate is 10 percent and the maximum federal tax rate is 39.6 percent for any income over $415,050 (for single filers) or $466,950 (for married joint filers) as of 2016. Check out the estimated 2017 federal income tax brackets here. To calculate the amount to withhold each paycheck, the employer withholding tables are also published by the IRS.
- State income tax
Most states collect income tax too. New York and California typically have the highest rates, but it can vary by year. On the other end of the spectrum, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a personal income tax on wages. For you business owners out there, note that Tennessee does tax interest and dividend income.
- Any local taxes
Once again, there may be local taxes at the city, county, or municipality level that employees may be responsible to pay. Check with your local jurisdiction or payroll provider to ensure your payroll is compliant at the local, state, and federal levels.
In this sample paycheck from Gusto, you can see how both employer- and employee-paid payroll taxes are listed. Remember, only taxes paid by employees, not employers, reduce an employee’s net pay, which is the amount of money they take home after all the taxes and deductions are taken out.
Updated September 26, 2017
This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.