Q: What Are Employee and Employer Payroll Taxes?

Payroll taxes are taxes paid on wages or salaries that employees earn. Payroll taxes are paid by both employers and employees.

Employees can usually be distinguished from other types of workers, like independent contractors or self-employed individuals, based on the work, payment terms, and relationship they have with their employer. Generally, if you offer a worker employment benefits, withhold taxes from their paycheck, and set their work and payment terms, that person is considered an employee of your organization.

What’s the main difference between employee and employer payroll taxes?

Even though payroll taxes are paid by both employers and employees, there’s one major difference. Payroll taxes paid by employees affect employees’ net pay, but payroll taxes paid by employers don’t. 

Taxes that employees pay are 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 paycheck. Here’s a summary of the payroll taxes that employers and employees pay.

Keep in mind that payroll taxes are different from employment taxes, although they share some overlap. 

Employment taxes include Medicare, Social Security, FUTA, and federal income taxes as well as Additional Medicare Taxes for eligible employees (more on these below). Although some may come from employee wages, employers automatically withhold and submit them to the Internal Revenue Service (IRS) on their behalf.

Meanwhile, payroll taxes are those that are taken out from an employee’s paycheck and matched by their employer—and more specifically, Social Security and Medicare taxes. 

To put it one way, all payroll taxes are employment taxes but not all employment taxes are considered payroll taxes. 

Payroll taxes that both employees and employers pay 

Both employers and employees pay FICA tax, or Social Security and Medicare taxes, as a result of the Federal Insurance Contributions Act. It’s a 50-50 split.

Social Security tax

The 2022 Social Security tax is 12.4%. That’s 6.2% for employers and 6.2% employees.

This rate is applied to the first $147,000 your employee earns, so if your employee makes more than that amount in a calendar year, there won’t be any Social Security taxes withheld once they hit that wage base limit. 

Medicare tax

The Medicare portion of the FICA tax is 2.9% of gross wages, and it’s applied to every dollar your employee earns. So for this tax, it’s 1.45% that you pay, and 1.45% that your employee pays. 

Employer payroll taxes

Here are the taxes that only employers, not employees, pay when it comes to payroll.

Related

Q: What Are the Different Types of Payroll Deductions?

Finances and Taxes

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% toward FUTA, though companies who pay their state unemployment taxes on time can receive a tax credit up to 5.4% towards their FUTA tax rate. After all is said and done, the FUTA tax rate usually equals 0.6% of all taxable wages—up to the first $7,000 earned for each employee.

The list of states currently 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 lost their job through no fault of their own and are actively 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 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.

Employee payroll taxes

Federal income tax

This tax is paid by employees only and is calculated based on their total income, filing status, and personal exemptions. The 2022 federal tax rate is between 10% and 37%. 

To calculate the income tax withholding amount for each employee’s paycheck, use their Form W-4 and the IRS employer withholding tables or run payroll through a payroll software.

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. (Note: Tennessee does tax interest and dividend income.)

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.

Employee payroll taxes

Federal income tax

This tax is paid by employees only and is calculated based on their total income, filing status, and personal exemptions. The 2022 federal tax rate is between 10% and 37%. 

To calculate the income tax withholding amount for each employee’s paycheck, use their Form W-4 and the IRS employer withholding tables or run payroll through a payroll software.

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. (Note: 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 government or your payroll provider to ensure your payroll is compliant at the local, state, and federal levels.

Additional Medicare Tax

Okay, this last one is for the high earners.

If your employee makes more than $200,000, they are also subject to the Additional Medicare Tax. As the employer, you must withhold 0.9% of wages beyond $200,000.

Learn more about specific payroll taxes in your state:

• California
• Florida
• Illinois
• Michigan
• New York
• North Carolina
• Ohio
• Pennsylvania
• Texas
• Washington       

Employer payroll tax payment and filing requirements 

Every employer must pay their share of payroll taxes as well as the money they’ve withheld from their employees’ paychecks. 

Companies must deposit these withholdings plus their own tax contributions to the IRS on a monthly or semi-weekly basis through the Electronic Federal Tax Payment System (EFTPS). Although the schedule you follow will depend on the kind of business you have, you can find out your deposit schedule and tax due dates with IRS Publication 15.

In addition to withholding and depositing payroll taxes, employers must file Form 941 every quarter. Every year, they must also file Form 940 and Form 945, as well as Forms W-2 for every employee.

Your small business may also need to deposit withholdings and file reports or tax statements with your state and local government agencies, depending on their requirements. 

Payroll tax penalties

Failure to file Form 941 or Form 944 (the Employer’s Annual Federal Tax Return) by the due date results in a penalty fee based on the amount you owe and how many days late the tax forms are submitted. 

The penalty fee breakdown is as follows:

If you are:	Penalty
One to five days late in filing the forms	2 percent
Six to 15 days late in filing the forms	5 percent
16 or more days late in filing the forms	10 percent
Within 10 days of receiving the first late notice from the IRS	10 percent
So late that over 10 days have passed since you received the first late notice from the IRS	15 percent

On the other hand, if you don’t pay your payroll taxes on time, you could be charged a trust fund recovery penalty (TFRP). So in addition to making good on your payroll taxes, you’d have to pay an TFRP equal to the amount you owe plus interest. 

Where to find payroll tax deductions on a paystub

Employees can typically find a breakdown of their payroll taxes in the Deductions section or the Taxes Withheld section of their pay stub. 

This breakdown will include the amount of money withheld for taxes from that pay period plus the amount that has been withheld for the year to date. In some cases, employer contributions for the pay period and the year may be included as well.