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 their work, payment terms, and relationship 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 from 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.)
The employer’s share of payroll taxes does not affect an employee’s paycheck. Here’s a summary of the payroll taxes that employers and employees pay.
Employer payroll taxes:
- Social security tax
- Medicare tax
- Federal unemployment tax (FUTA)
- State unemployment tax (SUTA)
- Applicable local taxes for employers
Employee payroll taxes:
- Social security tax
- Medicare tax
- Federal income tax
- State income tax
- Applicable local taxes for employees
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 2024 Social Security tax is 12.4%; that’s 6.2% for employers and 6.2% for employees (this is unchanged from previous years).
This rate is applied to the first $168,600 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 business taxes that 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 tax credit of up to 5.4% toward 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 jobs 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 taxes 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.
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 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. (Those states—along with Hawaii, New Jersey, Puerto Rico, and Rhode Island—also collect State Disability Insurance tax.) 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. Learn more about specific payroll and tax information for your state:
Any local taxes
There may be local taxes at the city, county, or municipality level that employees may be responsible to pay. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site.
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
This applies to high earners that make more than these income thresholds, according to filing status:
- $250,000 for married filing jointly
- $125,000 for married filing separately
- $200,000 for all other taxpayers
Note: As an employer, you must withhold 0.9% of wages beyond $200,000 in a calendar year for the Additional Medicare Tax, regardless of filing status. That withholding begins with the first pay period in which the pay exceeds $200,000, and continues until the end of the calendar year.
Employer payroll tax payment and filing requirements
Every employer must pay their share of payroll tax rates as well as the money they’ve withheld from their employees’s 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 … | The penalty is … |
| One to five days late in filing the forms | 2 percent of the unpaid amount |
| Six to 15 days late in filing the forms | 5 percent of the unpaid amount |
| 16 or more days late in filing the forms | 10 percent of the unpaid amount |
| Receiving the first late notice from the IRS, requesting immediate payment on that day | 15 percent of the unpaid amount |
| So late that over 10 days have passed since you received the first late notice from the IRS | 15 percent of the unpaid amount |
On the other hand, if you don’t submit your tax deposits 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 a TFRP equal to the amount you owe plus interest.
Where to find payroll tax deductions on a pay stub
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.
Employee and employer payroll taxes: FAQ
What is the difference between a withholding tax and a non-withholding tax?
Withholding tax entails the payer to debit and remit a portion of income directly to the government in payment of their tax liability. Non-withholding tax requires the recipient to independently calculate, report, and remit their income tax directly to the government. The key distinction lies in whether the taxpayers make payments upfront or at the end of the tax year.
How do I get an income tax return?
Employers and employees can file for income tax refunds easily through the government’s electronic filing system or with an authorized e-file provider. In some cases, filers must comply with deadlines to get their return.
