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- Highlights
- Introduction
- Employer Payroll Tax Basics
- 2025 Employer Payroll Tax Rules Made Simple
- Federal Payroll Taxes Employers Must Withhold
- State and Local Payroll Tax Obligations
- Calculating Employer Payroll Taxes
- Payroll Tax Reporting and Filing Requirements
- Avoiding Common Payroll Tax Mistakes
- Final Thoughts on Employer Payroll Taxes
- Frequently Asked Questions
- Recommended Reads
Highlights
- Find out how employer payroll taxes are not the same as income taxes and why it’s important for a business to know the difference.
- Learn about federal payroll taxes you have to pay, such as Social Security, Medicare, and FUTA, to follow the rules.
- Take a look at state and local payroll tax rules, which may change based on where you are.
- See how you can figure out taxable wages the right way and use the correct payroll tax rate.
- Stay away from payroll tax fees by learning how not to mix up your workers’ roles and how to file everything right.
- Get answers about employer payroll taxes, like how to figure them out and when you have to pay them.
Introduction
Handling payroll taxes is one of the most important jobs for anyone who runs a business and has staff. These taxes include Social Security, Medicare, and unemployment taxes. They are a major part of the job if you have staff. Federal payroll taxes are split between those who work and those who hire. Some state and local taxes are only paid by the business owner. When you know how to handle payroll tax problems, it helps you run your business the right way and stay out of trouble. In the following sections, we will talk about the main parts of taxes that a business owner needs to handle so you can deal with them well.
Employer Payroll Tax Basics
Handling payroll taxes can feel hard at first. But when you look at each step, it gets easier. These are taxes you pay for your employees’ wages. The money goes to important government programs, like Social Security and unemployment.
Those who hire people must handle payroll taxes the right way, by law. This means they need to know how to figure out which wages can be taxed and send in tax forms on time. If they do not do this, there can be big problems. These may be fines or even someone checking their records. The first thing to do if you want to manage payroll the right way is to know what you must do in this role.
2025 Employer Payroll Tax Rules Made Simple
According to the IRS, in May 2025, employers and workers both pay 6.2% of wages to Social Security, but only up to $176,100 in yearly pay. They also each pay 1.45% for Medicare with no income limit. If an employee makes over $200,000, the employer must withhold an extra 0.9% for Medicare. Only employers pay unemployment tax under FUTA, and they must file a special form (Form 940) each year by January 31—or by February 10 if all taxes were paid on time. These rules make sure federal benefits like retirement and unemployment are funded the right way.
What Are Employer Payroll Taxes?
Payroll taxes for employers are extra payments you have to give to the government when you hire workers and pay them a wage. These taxes fall into two main groups. Some are paid by both you and your workers, like Social Security and Medicare. Others are paid only by you, like unemployment taxes.
When you pay payroll taxes that you share with your workers, you need to take out their part from their pay before you send in taxes to the federal government. The taxes that the business has to pay, such as FUTA and SUTA, are figured out using the worker’s total pay before taxes. These are based on certain rules set by the law.
Unlike income tax, where the employees pay all of it, employer payroll taxes are yours to handle. You have to make sure the payments are correct and follow the rules. This is important to stay away from fines and to keep your business in good shape.
Payroll Tax vs. Income Tax
Income taxes and payroll taxes are not the same, but both play a big part in how people get paid. Payroll taxes are money that both the boss and the worker pay together. This money goes to Social Security and Medicare. These are also called FICA taxes. In most cases, the boss sends their part to the federal government. At the same time, the worker has their part taken out of each paycheck.
In contrast, income tax is taken from paychecks based on federal tax brackets. The people who work pay most of the income taxes. This tax money goes to things like schools and taking care of roads.
| Feature | Payroll Tax | Income Tax |
|---|---|---|
| Payer(s) | Shared between the employer and the employee (e.g., Social Security, Medicare/FICA). Some (like FUTA and SUTA) are paid only by the employer. | Primarily paid by the employee. The employer withholds it from the paycheck, but it’s the employee’s tax liability. |
| Purpose | Funds specific government programs and benefits, such as Social Security (retirement, disability, and survivor benefits), Medicare (healthcare for seniors), and unemployment insurance (for those who lose jobs). | Funds broader government operations and services, including schools, roads, national defense, and other general government programs. |
| Components | Primarily FICA (Social Security and Medicare), Federal Unemployment Tax Act (FUTA), and State Unemployment Tax (SUTA). Can also include additional state and local payroll taxes (e.g., some state income taxes, short-term disability contributions, and local income taxes). | Federal income tax. May also include state income tax and local income tax, depending on the jurisdiction. |
| Calculation | Calculated based on a set percentage of the employee’s taxable wages. Social Security has a wage limit, while Medicare generally does not (with an additional tax for high earners). Rates are often fixed percentages. | Calculated based on federal tax brackets and the employee’s total income. The amount withheld depends on factors like filing status and W-4 elections, allowing for more individual control over withholding. Rates are progressive (higher earners pay a higher percentage). |
| Employer Role | Employers are directly responsible for paying their portion and for withholding and remitting the employee’s portion to the government. They have significant legal obligations to ensure accuracy and timely payment. | Employers are primarily withholding agents. They deduct the tax from employee paychecks and remit it to the government, but the ultimate responsibility for the correct amount of income tax owed lies with the employee, who reconciles it when filing their annual tax return. |
| Impact on Business | Directly impacts a business’s labor costs, as employers pay a significant share of these taxes. Errors can lead to substantial fines and audits. | While employers handle the withholding, income tax is generally a direct cost to the employee, not the business’s operating expenses (though it’s part of the overall payroll process). |
For employers, it is important to know the difference between these two types of taxes. Payroll taxes help fund programs that support people who have retired and people who do not have jobs. Income taxes help pay for other things the government does. If you know about both, you can make sure you handle your tax duties in the right way.
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Federal Payroll Taxes Employers Must Withhold
If you hire people, you have to take care of federal payroll taxes. These taxes help fund national programs. The Federal Insurance Contributions Act, or FICA, covers things like Social Security and Medicare taxes. Both you and the people you hire pay an equal share of these taxes.
You will also have to pay FUTA taxes. These help fund programs for people who do not have jobs. The FUTA tax is taken as a part of what you pay your workers. These rules are important, and you must follow them because the federal government says so. Now, let’s look at the details of these taxes and what you need to know about them.
The Federal Insurance Contributions Act, or FICA, includes both Social Security and Medicare taxes. These are a big part of payroll taxes that every business has to take care of. The Social Security tax goes to help people who are retired, those who cannot work because of a sickness or injury, and family members if someone dies. The Medicare tax helps pay for the health care of those who are 65 and older. Both the people who work and the companies they work for split the costs and pay the same amount. The tax rates for both are set every year. People who make more money might have to pay an extra Medicare tax, which is because the tax system changes with how much you earn. Knowing about these taxes is very important for making sure payroll goes smoothly.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) says that employers must pay a tax. This tax helps pay for money given to workers if they lose their jobs. Employers pay the tax on the first $7,000 of each worker’s wages before taxes. The FUTA tax is not taken from worker paychecks. The employer pays it in full. Also, FUTA gives a standard tax rate to follow. But employers can sometimes get credits if they pay state unemployment taxes. This can bring down the amount of tax they owe.
State and Local Payroll Tax Obligations
Payroll tax rules are not just at the federal level. Employers also need to handle state and local taxes. State payroll taxes, like the state unemployment tax, can change depending on where you are. Some places ask workers to pay too, but many say that only the employers need to pay.
Cities and other local places might add extra payroll taxes. This could be a local income tax. They use this money to pay for things or programs in their area. It is important for you to know about state and local rules. This helps you meet all the standards and be in compliance.
State Unemployment Tax (SUTA)
State unemployment taxes, or SUTA, help pay for programs that support people without jobs in each state. These taxes are taken as a set percent from what a person earns at work. The money goes into the state’s unemployment insurance fund. The company must send these payments with other federal payroll taxes. The amount is worked out by local rules and how well the business followed those rules before. The SUTA rate can change from state to state, depending on the economy there. This affects how much tax a company will owe. With this system, people who work can get help if they lose their jobs.
Additional State and Local Payroll Taxes
Besides SUTA, there can be other state and local payroll taxes that employers have to pay. This depends on where the business is. Here are some other common taxes they might have to deal with:
- State income taxes: Most states need workers to pay these taxes. A few states, like Alaska, Florida, and Texas, do not do this.
- Short-term disability and paid family leave contributions: States such as New York and California ask for these as well.
- Local income tax: Some cities, including New York and Philadelphia, also add this to what you pay from your work.
- Employment-based programs: These taxes help pay for training and job programs.
Knowing these tax rules helps employers stay on top of what they need to do. This way, they can handle things the right way and follow the rules.
Calculating Employer Payroll Taxes
Payroll tax calculations rely on taxable wages and the right tax rates. First, you need to find out your employee’s total pay. Be sure to count overtime, bonuses, or anything earned as commission. After you do that, use the rates given by the federal, state, or local government.
Mistakes with pay or pay rates can lead to fines or surprise bills. When employers use correct payroll steps and keep records, they make paying taxes easier.
Determining Taxable Wages
Taxable wages are the total pay that you have to pay payroll taxes on. This can be your salary, hourly pay, tips, and some types of benefits. Employers work out the gross wages first. They do this before they take any money out for things like healthcare savings accounts or retirement plans.
Carefully checking the money that can be taxed helps make sure the right amount of tax is kept back. It also helps to stop any mistakes when you report what you earn. Be sure to check pay details, especially when you get a bonus or commission. Also, include any extra money that can change the amount of payroll tax you have to pay.
Applying the Correct Tax Rates
Using the right payroll tax rates is important so that you follow the rules. The rates change for each kind of tax. Social Security takes 6.2% up to a set wage limit. Medicare takes 1.45%, and there is no limit for this. Unemployment taxes use other rates. These rates depend on if you follow state or federal rules.
Employers need to check the right rates often with the federal, state, and local governments. Software tools or payroll services help make these steps easier. They lower risks and help make sure payments are made on time.
Payroll Tax Reporting and Filing Requirements
Timely tax reporting is as important as doing the right math in payroll. Employers have to fill out payroll tax forms for federal, state, and local offices. This helps keep records in order. Each year, filings like Form W-2 have to be done to show worker tax payments.
Deposits are usually set up to go every month or every three months through systems like the Electronic Federal Tax Payment System (EFTPS). It is good to stay organized. This helps you not miss any deadlines or get a penalty for sending late payments.
Needed Payroll Tax Forms for Employers
Employers have to deal with a few payroll papers. These papers include both quarterly and annual returns. They do this so they can stay in line with the rules.
- Form 941: Every three months, this federal tax form shows income tax, Social Security, and Medicare amounts taken out.
- Form W-2: Each year, this form shows workers’ pay and deductions.
- Form 940: This is the yearly FUTA tax form for those who pay others to work for them.
- Form 944: Each year, smaller businesses fill out this form to show totals.
These forms, along with other forms like Forms W-3 and 1096 used for sending information, help keep reporting the same and meet the tax rules that a boss has to follow.
Filing Schedules and Deadlines
The IRS tells you when to file based on how much tax you need to deposit. Most employers send in returns every quarter, like Form 941. If you have a smaller payroll, you might be able to send your tax forms only once a year by using Form 944.
Deadlines are not always the same. But you have to make these payments every three months. The dates are usually the last day of the month after those three months end. For example, you would file for the first three months by April 30. The EFTPS helps you pay online and keeps a record of what you have paid.
Avoiding Common Payroll Tax Mistakes
Payroll tax mistakes can make you pay big fines and deal with a lot of rules. Some of the common errors are not putting workers in the right group or filing late. These mix-ups cost a lot. Avoid these problems with reliable systems. Make sure you group your workers right. Double-check tax totals. Have a clear plan for when to file tax forms.
Come up with plans ahead of time by using payroll software. You can also ask experts for advice or work with automation providers. This helps lower risks and makes things run more smoothly.
Misclassification of Employees
Misclassifying workers, like calling independent contractors employees, can cause big payroll tax problems. A contractor has to pay their own self-employment (SE) tax. Employees, on the other hand, depend on you to handle their tax payments.
Missteps when classifying can lead to audits or fines. Make sure you know if a worker is an employee or contractor by following tips from the IRS and your state’s work department. Getting the classification right can help lower risks and problems for your company.
Late Payments and Filing Errors
Late filings or not making tax deposits on time can bring payroll tax penalties or fees for not following the rules. The IRS sees the taxes you hold back from people’s paychecks as a trust fund debt. You have to pay or deposit this money right and on time.
Planning ahead helps you avoid mistakes. Try to match your deposit dates with your work calendar. You can use payroll software to help send things in without mistakes. Always try to finish everything on time. This helps you stay in line with the rules.
Final Thoughts on Employer Payroll Taxes
To sum up, it is important to know about payroll taxes if you own a business. When you learn about things like FICA, FUTA, and what your state needs, you can follow the rules and not make costly errors. Keep up to date with the tax rates, what you need to report, and when things are due. This can make doing payroll much easier for you. When you figure out these taxes correctly, you do not face fines and your business money matters stay in good shape. If you have any other questions or want help with payroll taxes, you can ask at any time. Taking action now means your business can run better in the future.
Frequently Asked Questions
How do I figure out the payroll taxes my U.S. business must pay?
Start with each employee’s gross wages. Apply the employer rates: 6.2 % Social Security, 1.45 % Medicare, 6 % FUTA on the first $7,000 in wages, plus your state’s SUTA rate and wage base. Payroll software or IRS Pub 15‑T can crunch the totals quickly.
Which payroll taxes are paid only by employers?
Employers alone cover their half of Social Security and Medicare, the full Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA). These amounts are never withheld from the employee’s paycheck.
What happens if payroll taxes are late or unpaid?
Expect IRS penalties, interest, and possible liens or criminal charges. Pay on time, monitor IRS and state updates, and use reliable payroll tools or a tax pro to stay compliant.
Reviewed and edited by Albert Fang.
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Article Title: How Employer Payroll Taxes Work
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Source Citation References:
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Internal Revenue Service. (2025, May). Publication 15 (Circular E), Employer's Tax Guide.
Internal Revenue Service. (2025, May 22). Topic No. 759 – Form 940 and FUTA.
