If you're preparing to launch or grow a small business, the idea of managing payroll taxes might feel overwhelming. You may even wonder what payroll taxes are.

In simple terms, payroll taxes are the taxes employers and employees pay to the federal, state, and local government agencies on wages, such as tips and salaries.

Understanding these taxes is an important first step toward calculating them correctly.

This article is designed to help you by providing a clear overview of payroll taxes, along with a look at the types of payroll taxes, how to calculate tax payments, and your responsibilities as an employer.

What are Payroll Taxes?

Let’s take a closer look at what payroll taxes can include.  

Whenever you run payroll, you're responsible for paying certain taxes to both federal and state government agencies. These payroll taxes include Social Security and Medicare (known as FICA), federal unemployment (FUTA), state unemployment (SUI), and local taxes, each with different rates and requirements.

While not payroll taxes, employers may also be responsible for additional payments and deductions such as workers' compensation insurance and health insurance premiums.

Your employment taxes and expenses have a direct impact on your business's cash flow and labor costs. That’s not all. Paying them is required by state and federal laws, so making the correct calculations, deductions, and payments is extremely important.

Read more about which payroll taxes are paid by employers here.  

Keep in mind that you're also responsible for withholding employee income taxes, which are different from payroll taxes.  

Payroll taxes are calculated based on employee wages and help fund programs like Social Security, Medicare, and unemployment insurance. Income taxes, on the other hand, are based on the employee’s total taxable income and vary depending on individual factors like their filing status and W-4 elections.  

While payroll taxes are often a shared responsibility between employers and employees, income taxes are paid entirely by the employee. Your role as the employer is to withhold and remit them properly.  

What Are Payroll Taxes Used For?

Understanding what payroll taxes are used for can provide a better sense of their impact, both on your business and on the broader economy. Some payroll taxes fund government programs that provide long-term support for employees, including Social Security and Medicare.

Social Security offers retirement income to eligible workers, survivor benefits to families of deceased workers, and disability assistance to people who can’t work due to medical conditions. Payroll taxes are the primary source of funding for these programs.

Medicare provides health insurance for individuals aged 65 and older, as well as for younger people with qualifying disabilities.

In addition to FICA taxes, employer-paid payroll taxes fund unemployment insurance programs.

At the federal level, the Federal Unemployment Tax Act (FUTA) helps states cover the cost of unemployment benefits for eligible workers who are let go for reasons beyond their control.

State unemployment insurance (SUI) provides additional funding so unemployed individuals can access temporary financial support while they search for new work.

Types of Payroll Taxes Employers Need to Know

Federal Payroll Taxes

Federal payroll taxes include:

• Income tax withholding  

• Social Security tax

• Medicare tax

Let’s break these down.

Income tax withholding is based on the employee’s wages and the information they provided on Form W-4, Employee’s Withholding Certificate. You are responsible for calculating, deducting, and remitting the correct amount based on IRS tax tables.

Social Security tax is split evenly between the employee and the employer. The total rate is 12.4%, with each party paying 6.2%. This tax applies up to the annual wage limit set by the federal government.

Medicare tax is 2.9% total, also split between the employer and employee. Additional Medicare taxes of 0.9% apply to employees earning more than $200,000 annually. This extra amount is only paid by the employee.

State and Local Payroll Taxes

State and local payroll tax requirements vary widely by location, but we list some common types below.

State Unemployment Insurance (SUI or SUTA): Most states require employers to pay this tax, which funds state-level unemployment benefits. Rates depend on your state, your industry, and your company’s unemployment claims history.

State Disability Insurance (SDI): A handful of states, including California, New York, New Jersey, Rhode Island, and Hawaii, require disability insurance coverage, which may be funded by the employer, employee, or both, depending on state law.

Local payroll taxes: In some cities and municipalities, additional taxes may apply to wages. These could include school district taxes, transit taxes, or local income taxes. Always check your local tax authority’s requirements.

Employer-Only vs Shared Taxes

While many payroll taxes are split between employers and employees, some fall entirely on the employer. In these cases, you cover the full amount. Nothing is withheld from employee paychecks.

One example is the FUTA tax, which helps fund the federal portion of unemployment insurance. FUTA is charged at a rate of up to 6% on the first $7,000 of each employee’s wages, but most employers qualify for a credit that reduces the effective rate to 0.6%.

Another commonly employer-funded tax is SUTA, which supports state-level unemployment benefits. In most states, this is an employer-only obligation. However, a few states, such as Alaska, New Jersey, and Pennsylvania, require employees to contribute.  

How Payroll Tax Works: Employer Responsibilities

As an employer, you're responsible for calculating and withholding payroll taxes each pay period. This involves identifying which taxes apply and determining how much to withhold from each employee’s paycheck — and how much you owe as the employer.

In most cases, calculations begin with an employee’s gross pay, the total amount earned before taxes and other deductions, and involve multiplying that amount by each relevant tax rate:

• Social Security tax: 6.2% of wages (matched by the employer)

• Medicare tax: 1.45% of wages (also matched by the employer)

• FUTA tax: 6% of the first $7,000 in wages, minus a credit of up to 5.4%, making the typical effective rate 0.6%

• SUTA tax: varies by state, based on the employee’s wages and your assigned rate

Once you’ve calculated each tax, the next step is to submit payment to the appropriate federal and state agencies. Your total payment will typically include:

• Your employee’s share of FICA taxes  

• Your share of FICA taxes

• Your FUTA and SUTA taxes (in most states)

You’ll also need to remit your employee’s federal and, if applicable, state income tax.

In addition to calculating and withholding payroll taxes, employers are also responsible for reporting these taxes to the IRS on a regular schedule.  

Payroll Tax Examples for Small Businesses

Understanding payroll taxes in theory is one thing but seeing how they work in practice can make a big difference. Here's a simple example to help you visualize how payroll taxes are calculated and how the costs are shared between employer and employee.

Let’s say you hire an employee at a weekly gross wage of $1,000. Here's how payroll taxes break down for that pay period.

Employee tax withholding:

• Federal income tax (based on 2024 IRS tax tables for a single filer, no dependents): $98.10

• State income tax (New York state estimate 5% withholding): $50

• Social Security tax (6.2%): $62

• Medicare tax (1.45%): $14.50

Total employee tax withholding: $224.60

Employer contributions:

• Social Security tax (6.2%): $62

• Medicare tax (1.45%): $14.50

• FUTA tax (0.6% of first $7,000 in wages): $6

• SUTA tax (example rate of 2.7%): $27

Total employer payroll tax contribution: $109.50

Summary:

• The employee receives a paycheck for $775.40 after $98.10 in federal income tax, $50 in New York state income tax, and $76.50 in FICA taxes are withheld.

• The employer pays $1,109.50 total, which includes $1,000 in gross wages plus $109.50 in payroll taxes.

Note: State income tax rates and withholding rules vary. This example uses an estimated 5% rate for New York for simplicity.

Payroll Tax Tips for Employers

Not only will you need to carefully calculate payroll taxes and make the payments, but you also need to file forms with the IRS and deposit taxes on time.  

How often you need to deposit depends on your payroll size and how much tax you withhold. Most employers will fall into either a monthly or semi-weekly deposit schedule, which the IRS determines based on prior tax liability.

One of the most commonly required forms is Form 941, the Employer’s Quarterly Federal Tax Return. It summarizes the income taxes, Social Security, and Medicare taxes you've withheld, along with your share as an employer.

You may also need to file:

• Form 940, Employer’s Annual Federal Unemployment Tax Return

• Form W-2, reporting your employees’ annual earnings and withholdings

• Form W-3, which totals all W-2s submitted to the Social Security Administration.

Missing a deposit or filing incorrect information can lead to IRS penalties, so it’s important to stay on top of deadlines and keep your payroll records organized.

If the idea of calculating, paying, and reporting payroll taxes is starting to sound overwhelming, you’re not alone. That's why many small business owners turn to payroll services like SurePayroll® by Paychex to handle payroll taxes automatically, helping them save time, reduce errors, and focus on growing their business.

How SurePayroll Can Help Manage Payroll Taxes

SurePayroll can help take the stress out of payroll taxes with tax calculations, filings, and deposits.  

For over 25 years, we’ve helped businesses thrive by helping them take care of the ins and outs of payroll and payroll taxes—leaving you more time to build your business, train your team, and focus on your business plan.  

Make payroll the easiest thing on your to-do list. Get simple, fast, dependable payroll services with SurePayroll.

Learn how you can simplify your payroll taxes with SurePayroll.

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