Q: What Are Employee and Employer Payroll Taxes?

Update as of August 11, 1:00pm, ET: President Trump signed an executive memo on August 8, 2020 that calls for a deferral of payroll taxes for employees.

To understand how this may affect your business or your team read Gusto’s analysis of the Payroll Tax Deferral Executive Memorandum.

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 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 is 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 full summary of the payroll taxes that employers and employees pay.

Employee employer payroll taxes - Gusto

Payroll taxes that both employers and employees pay

Both employers and employees pay FICA tax, which is Social Security and Medicare Taxes. It’s a 50-50 split.

Social Security tax

The 2019 Social Security tax is 12.4%. That’s 6.2% for employers and 6.2% employees.

This rate is applied to the first $132,900 your employee earns, so if your employee makes more than that amount in a year, there won’t be any Social Security taxes withheld once they hit that 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.

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 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 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 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

You guessed it, next up are the taxes that only employees pay.

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Federal income tax

This tax is paid by employees only and is calculated based on their total income, filing status, and personal exemptions. The 2019 federal tax rate is between 10% and 37%. 

To calculate the amount to withhold each paycheck, use 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.

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  • Stephanie Hendricks

    What is the difference between employer payroll taxes and withholding deduction?

    • Gusto Editors

      Hi Stephanie! Employer payroll taxes are also known as FICA taxes (which include Social Security and Medicare withholding). Withholding deductions refer to federal, state, and local income tax withholding.

  • Joe

    So, a total of 25.3% of tax is paid by employees ?

    • Gusto Editors

      Hi Joe — how much tax employees pay can vary by location and industry. For further questions about how much tax an employee at your company will pay, consult a CPA or tax advisor.

  • carol grace zammit

    hello i have one private company. i m working alone but i want to hire one person more. i do not know totally how much i need to pay for one person with minimum wage. ( insurance – salary- tax- social tax ) thank yu

  • Michelle Hill-Nesbit

    Employee does not want any taxes taken out their paycheck. Can we as the employer not withhold any taxes?

    • Gusto Editors

      Hi Michelle — employers generally must withhold certain federal taxes, such as Social Security and Medicare taxes, from their employees’ wages. The IRS does allow for exemptions from some federal taxes, but the employee must file an application for such an exemption. When determining how much to withhold, you should review the employee’s Form W-4.

      Beyond federal taxes, the employee may also be subject to certain state and local income tax withholdings. These requirements can vary, so employers should review the withholding requirements for the employee’s work and home state. We also suggest you review President Trump’s recent executive order, which would temporarily defer payment of employee Social Security taxes.


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