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A clear, employer-focused guide to payroll taxes, including calculation, reporting, and payment requirements.
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Payroll taxes are a required part of employing workers, but understanding how they work can be challenging. Employers are responsible for calculating, withholding, and reporting certain payroll taxes accurately and on time. While payroll software can handle the calculations for you, it’s important to understand how these taxes work.
This guide explains what payroll taxes are, who pays them, how they’re calculated, and how they’re filed and reported.
Table of Contents
Payroll taxes are taxes tied to employee wages, including income tax withholding, Social Security and Medicare taxes, unemployment taxes, and applicable state or local payroll taxes.
Payroll taxes apply only to employees. Independent contractors are responsible for paying their own taxes and are not subject to payroll tax withholding. The sections below break down each payroll tax and explain how it’s handled.
Employers are responsible for withholding and paying several federal payroll taxes, including federal income tax, Social Security and Medicare taxes (FICA), and federal unemployment tax (FUTA).
Because some payroll tax rates change periodically, employers must stay current on applicable requirements.
Federal income tax is withheld from employee wages based on the employee’s income level and withholding information. The U.S. uses a progressive tax system, meaning higher levels of income are taxed at higher rates.
Employees indicate their withholding preferences on Form W-4. Employers are responsible for collecting this form and withholding the correct amount of federal income tax based on the information provided.
Employers are responsible for withholding and paying several federal payroll taxes in addition to federal income tax. This includes Social Security tax, Medicare tax, and Federal Unemployment Tax (FUTA).
| Tax | Who Pays | Rate | Notes |
|---|---|---|---|
| Social Security | Employer & Employee | 12.4% total (6.2% each) | Applied to taxable wages up to the annual wage base |
| Medicare | Employer & Employee | 2.9% total (1.45% each) | No wage cap |
| FUTA | Employer only | 6.0% | Applies to the first $7,000 paid to each employee annually |
In addition to federal payroll taxes, employers may be responsible for state and local payroll taxes. These requirements vary by location and typically depend on where your employees work.
| Tax Type | What It Covers | Key Notes |
|---|---|---|
| State Income Tax Withholding | State-level income tax withheld from employee wages | Rates and rules vary by state; some states do not impose income tax |
| State Unemployment Tax (SUTA) | Funds state unemployment benefits | Employer-paid; rates and wage bases vary by state |
| Local Payroll Taxes | City or local income/payroll taxes | Applies in certain cities or municipalities |
Most states require employers to withhold state income tax from employee wages. Rates, brackets, and withholding rules vary widely, so employers should rely on withholding tables and guidance published by their state tax authority.
Some states do not impose a state income tax, which may eliminate this requirement for employers operating solely in those states.
Nearly all states impose a state unemployment tax on employers. Rates and wage limits vary and are often influenced by your business’s industry and unemployment claim history.
Employers should confirm current requirements directly with their state labor or tax agency.
Certain cities and municipalities require employers to withhold local income or payroll taxes. These rules vary significantly by location and may apply based on where the employee works, not just where the business is located.
Employers are responsible for calculating, withholding, paying, and reporting payroll taxes. The cost of payroll taxes is shared between the employer and the employee, depending on the type of tax.
| Tax | Who Pays | Employer Responsibility |
|---|---|---|
| Social Security | Employer & Employee | Pay employer portion and withhold employee portion |
| Medicare | Employer & Employee | Pay employer portion and withhold employee portion |
| Federal Income Tax | Employee | Withhold and remit on employee’s behalf |
| FUTA | Employer only | Pay directly to the federal government |
| State & Local Payroll Taxes | Varies | Withhold and remit as required by state or locality |
When running payroll, employers must:
Payroll taxes apply only to employees. Independent contractors and self-employed individuals are responsible for paying their own taxes and are not subject to payroll tax withholding.
This includes covering the equivalent of both the employer and employee portions of applicable taxes when they file their returns.
Payroll taxes must be deposited on either a monthly or semiweekly schedule, depending on your business’s payroll tax liability. The IRS assigns your deposit schedule based on your prior tax reporting history.
Most small businesses fall under the monthly deposit schedule, while larger employers with higher payroll tax liabilities are typically required to deposit taxes on a semiweekly basis.
Monthly payroll tax deposits are generally due by the 15th of the following month. If the due date falls on a weekend or federal holiday, the deadline moves to the next business day.
Note: Deposit schedules and due dates are determined by the IRS and may change if your payroll size increases.
When running payroll, employers withhold both payroll taxes and income taxes from employee wages. While the terms are often used interchangeably, they refer to different types of taxes.
| Payroll Taxes | Income Taxes |
|---|---|
| Include Social Security and Medicare (FICA) taxes | Include federal, state, and local income taxes |
| Paid by both the employer and the employee (depending on the tax) | Paid by the employee |
| Collected and reported through payroll | Withheld through payroll and reported on income tax returns |
| Earmarked for specific programs (e.g., Social Security, Medicare) | Used for general government funding |
“Payroll taxes” is often used as an umbrella term for all taxes withheld from employee paychecks. Technically, however, payroll taxes refer to FICA taxes and certain employer-paid taxes, while income taxes refer specifically to federal, state, and local income tax withholding.
Employers are responsible for calculating, withholding, and remitting both payroll taxes and income taxes as part of the payroll process.
Calculating payroll taxes requires understanding your pay schedule, employee withholding information, and applicable tax rates. While payroll software can automate most calculations, it’s still helpful for employers to understand the basic process.
Employers can calculate payroll taxes manually or use payroll software. Manual calculations are possible, but increase the risk of errors and missed deadlines.
Payroll software can automate tax calculations, apply current tax rates, and generate required reports. Common providers include Gusto, Square, and ADP.
Before calculating payroll taxes, confirm how often you pay employees. Common schedules include weekly, biweekly, or monthly. Your pay frequency affects how wages and withholdings are calculated each pay period.
Federal income tax withholding is calculated using either:
Most small businesses rely on the wage bracket method, which aligns with IRS withholding tables and simplifies calculations.
Employee withholding amounts are based on the information provided on Form W-4. Employers use this information to calculate federal income tax withholding for each pay period.
After income tax withholding is calculated, employers calculate FICA taxes:
State and local payroll taxes are calculated according to applicable state or local rules.
In addition to required payroll taxes, employers may withhold voluntary, pre-tax deductions such as:
These deductions are applied after required tax withholdings and vary based on your benefits offerings.
Running payroll doesn’t end once you calculate employee pay and withholdings. Employers are also responsible for depositing payroll taxes, filing required reports, and maintaining payroll records.
As a small business owner, you are responsible for:
Payroll tax deposits must generally be made electronically using one of the following methods:
Most small businesses deposit payroll taxes on a monthly schedule, though deposit frequency depends on your payroll tax liability.
Employers must file payroll tax reports to summarize wages, withholdings, and employer-paid taxes.
| Filing Requirement | What It Covers | Typical Due Date |
|---|---|---|
| Quarterly payroll reports | Wages, income tax withholding, and FICA taxes | Last day of the month following each quarter |
| Federal unemployment reporting | FUTA wages and taxes | Quarterly (if applicable) |
| Year-end forms (W-2s & 1099s) | Employee and contractor earnings | January 31 |
Some small businesses may qualify to file annual payroll tax returns instead of quarterly filings, depending on IRS eligibility requirements.
Employers should maintain accurate payroll records for federal and state compliance. These records support payroll filings, year-end reporting, and any future audits or inquiries.
Employers are fully responsible for withholding, depositing, and reporting payroll taxes correctly. If errors occur, the employer — not the employee or a third-party provider — is liable for unpaid taxes, penalties, and interest.
Failing to deposit payroll taxes on time can result in penalties based on how late the payment is:
| Delay | Penalty |
|---|---|
| 1–5 days late | 2% |
| 6–15 days late | 5% |
| 16+ days late or after IRS notice | 10% |
| Maximum penalty | 15% |
Employers may also face penalties for:
Using a payroll service does not transfer liability. Even if a third party processes payroll, the employer remains responsible for compliance.
Payroll tax rules and rates can change, so employers should stay current with guidance from the Internal Revenue Service and applicable state agencies. Filing accurately, paying on time, and keeping proper records are the best ways to avoid penalties.
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