Q: What Are Employee and Employer Payroll Taxes? Your 2021 Guide

Last summer an executive memo was released allowing employers to defer payroll taxes for employees.

Employers who chose to defer deposits of their share of Social Security tax must pay 50% of the eligible deferred amount by December 31, 2021 and the remaining amount by December 31, 2022.

Additionally, IRS Notice 2020-65 allows employers to defer their employees’ share of Social Security taxes in 2020 as well. Although the repayment period ends on December 31, 2021, employers should send repayments to the IRS as they receive them.

In both cases, employers that don’t repay the deferred amount on time will be subjected to penalty fees and interest on the unpaid balance. For more information on these matters, read the IRS webpage on the deferral of employment tax deposits and payments and the memo on deferred employee 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, 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.

Employee employer payroll taxes - Gusto

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 an employee’s earnings, employers automatically withhold and submit them to the 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 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 2021 Social Security tax is 12.4%. That’s 6.2% for employers and 6.2% employees.

This rate is applied to the first $142,800 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 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

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 2021 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.

Learn more about specific payroll taxes in your state:

Employer payroll tax payment and filing obligations

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. Although the schedule you follow will depend on the kind of business you have, you can find out your deposit schedule 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.

You may also need to deposit withholdings and file reports 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) results in a penalty fee based on the amount you owe and how many days late the forms are submitted. 

The penalty fee breakdown is as follows:

If you are:Penalty
One to five days late in filing the forms2%
Six to 15 days late in filing the forms5%
16 or more days late in filing the forms10%
Within 10 days of receiving the first late notice from the IRS10%
So late that over 10 days have passed since you received the first late notice from the IRS15%

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

Gusto employee paycheck pay stub example

Employees can typically find a breakdown of their payroll taxes in the Deductions section (example above) or the Taxes 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. 

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Comments

  • Michelle Hill-Nesbit

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

    Reply
    • 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.

      Reply
  • 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

    Reply
  • Joe

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

    Reply
    • 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.

      Reply
  • Stephanie Hendricks

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

    Reply
    • 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.

      Reply

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