A Simple Guide to Which Payroll Taxes Are Paid by Employers

As an employer, handling payroll taxes is a big responsibility. To avoid penalties, taxes need to be withheld, filed, and remitted correctly. That’s a lot of pressure to avoid payroll mistakes.

But don’t stress. This guide will help you understand the basics of payroll taxes and your responsibilities as an employer. We’ll cover which payroll taxes are paid by employers, how they work, and the different types.

Let’s get into the essentials of payroll tax management.

Understanding Employer Payroll Taxes and How They Work

Employer payroll taxes are the fees that businesses must pay when they hire and pay employees. Some are paid by the business, and some are deducted from employee income. But even if the taxes come from employee wages, it’s the employer’s responsibility to make sure they calculate and deduct the amounts correctly.

If you’re an employer, one of your main responsibilities is handling payroll taxes. It’s important to understand these taxes to make sure you follow the rules and avoid penalties.

What Makes Up Payroll Taxes?

Payroll taxes include taxes on an individual’s salary, wage, bonus, commission, and tips. They fund Social Security, Medicare, unemployment benefits, and other government programs. There are 4 main types:

Social Security Tax. Social Security tax provides financial support for retired workers, disabled individuals, and their families.
Medicare Tax. Medicare Tax funds healthcare for individuals aged 65 and older and certain younger people with disabilities.
Federal Unemployment Tax. Federal Unemployment Tax (FUTA) helps workers who’ve lost their jobs access unemployment benefits.
State Unemployment Tax. State Unemployment Tax (SUTA) funds state unemployment insurance programs. This tax varies by state and is usually paid only by employers. Some states also require employee contributions.

What is FICA?

Employee contributions to the Federal Insurance Contributions Act (FICA) is the law. And it isn’t a separate tax. It encompasses the Medicare and Social Security programs.

How Payroll Taxes Work

How much is deducted for payroll taxes depends on your employees’ wages. But you and your employees share these taxes. Think of payroll taxes like a pie.

You and your employee each contribute a slice to cover Social Security and Medicare taxes.
As the employer, you add an extra slice to cover unemployment taxes.
Once you’ve collected all these slices, you send them to the government on a regular schedule. This is usually done quarterly (every 3 months).

What About Income Tax?

On top of handling payroll taxes, employers and employees must think about federal and state income taxes. These taxes fund important government services and programs, like education, healthcare, infrastructure, and public safety. For income tax, consider the following:

Federal and state income tax is deducted from employees’ paychecks to cover what they owe.
The amount taken out depends on factors like filing status, exemptions, and additional requests.
Employers are responsible for calculating and withholding income tax amounts from employees’ wages.
Employers are also responsible for sending those funds to the appropriate tax authorities.

Federal and state tax rates are subject to change each tax year. Visit the Internal Revenue Service (IRS) website or consult a tax professional for the most current information.

Payroll Tax Amounts Explained

Understanding the tax amounts involved in payroll is a must for all employers. Let’s break down the different payroll tax rates:

Social Security Tax:

The Social Security tax rate is 6.2% of wages for both employers and employees.
Employers and employees pay up to an annual limit, or taxable maximum, of $168,600 for 2024.
Both employer and employee each contribute 6.2%, totaling 12.4%.
If you’re self-employed, you pay the entire 12.4%.

Medicare Tax:

The Medicare tax rate is 1.45% of wages for both employers and employees.
Employees earning more than $200,000 pay an extra 0.9% themselves, which the employer withholds.
Both employer and employee each contribute 1.45%, totaling 2.9%.
Self-employed individuals pay the entire 2.9%.

Federal Unemployment Tax (FUTA):

The FUTA rate is 6% on the first $7,000 of each employee’s wages.
Potential credits for state unemployment taxes paid can reduce this rate to 0.6%.
The employer pays this tax.

State Unemployment Tax (SUTA):

The SUTA tax rate varies by state.
The wage base limit differs depending on state regulations.
This tax is usually paid by employers, though some states request employee contributions. Check the laws in the states where your business operates.

Self-Employment Tax:

The self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare, as mentioned above.
Self-employed individuals pay both the employer and employee portions, totaling 15.3%.

How to Calculate Payroll Taxes

Employers are responsible for collecting, calculating, and remitting all types of payroll taxes. Here’s a step-by-step guide on how to calculate each one:

Step 1: Calculate Employee’s Gross Wages

Determine the gross wages for each employee for the pay period (which is their total income before tax).
Deduct any non-taxable income or pre-tax deductions. Things like health savings accounts (HSA) or 401(k) plan contributions lower an employee’s taxable income.

Step 2: Calculate Medicare Tax

Employee’s Share. Multiply gross wages by 1.45%.
Employer’s Share. Multiply gross wages by 1.45%.
Additional Medicare Tax. For employees earning over $200,000, withhold an extra 0.9%.

Step 3: Calculate Social Security Tax

Employee’s Share. Multiply gross taxable wages by 6.2% (up to the annual limit of $168,600 for 2024).
Employer’s Share. Multiply gross taxable wages by 6.2% (up to the same annual limit).

Step 4: Calculate State Unemployment Tax (SUTA)

Employer’s Share. Multiply gross wages by the state-specific rate, up to the state’s wage base limit.

Step 5: Calculate Federal Unemployment Tax (FUTA)

Employer’s Share. Multiply the first $7,000 of each employee’s wages by 6%. Adjust for any state unemployment tax credits. This can be up to 5.4% for state unemployment taxes paid, which reduces the effective FUTA rate to 0.6%.

Step 6: Combine and Remit Taxes

Add up all the calculated tax amounts for Medicare, Social Security, and unemployment taxes. Deduct them from the employee’s paycheck.
Deduct federal and state income taxes withheld from the employee’s paycheck.
Remit the total tax amounts to the government according to the required schedule. Typically, this is done quarterly.
Make sure that the employee’s pay stub details deductions for their own bookkeeping.

RELATED ARTICLE — What Is a Pay Stub? A Comprehensive Guide

Employer Payroll Tax Deduction Example

Maria’s gross income for the month is $4,000. Pre-tax deductions are $200 for health insurance. So her gross taxable wages come to $3800. To calculate the employer’s share of payroll taxes:

Social Security Tax (6.2%): $3,800 x 0.062 = $235.60
Medicare Tax (1.45%): $3,800 x 0.0145 = $55.10
Federal Unemployment Tax (FUTA at 0.6%): $3,800 x 0.006 = $22.80
State Unemployment Tax (SUTA assumed at 2%): $3,800 x 0.02 = $76

The payroll taxes paid by the employer would be:

$235.60 + $55.10 + $22.80 + $76 = $389.50

The total employer taxes reported and paid for Maria’s earnings are $389.50. Employers would need to withhold and deposit the employee’s share of FICA contributions. They would also need to withhold federal and state income taxes before issuing Maria’s paycheck.

RELATED ARTICLE — What Is Taxable Income? A Complete Overview

Employer Payroll Taxes: 7 Essential Tasks to Consider

Here are some simple tasks you can do to stay on top of employer payroll taxes:

Set Deposit Schedules for Payroll Taxes. Set up a regular schedule for depositing payroll taxes to the IRS and state agencies. Doing this helps ensure your payments are on time to avoid late fees or penalties.
File Quarterly and Annual Reports. Employers must file IRS Form 941 quarterly. The purpose is to report Social Security, Medicare, and income taxes withheld. At the end of the year, Form 940 is used to report annual FUTA taxes.
Calculate Income Tax Withholding and Related Taxes. Calculate federal, state, and local income tax withholdings from employees’ paychecks. This includes understanding and applying the correct tax rates and wage limits.
Complete Additional Reporting. Prepare and submit any additional required reports, like state-specific tax filings and local tax documents. This may also include end-of-year W-2 forms for employees and 1099 forms for contractors.
Stay Informed on Tax Law Changes. Keep informed of changes in tax laws and regulations. This may involve adjustments to tax rates, wage limits, and new reporting requirements.
Maintain Accurate Records. Maintain detailed records of all payroll transactions, tax filings, and deposits. This documentation is important for audits and verifying tax compliance.
Stay Organized. Use invoicing software, like Joist, to track any and all payments you receive. This can help prevent errors and streamline your bookkeeping process. Keeping your finances organized makes payroll easier.

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Simplify Payroll Tax Management with Joist and QuickBooks Online

Managing payroll taxes doesn’t have to be complicated. By learning the basics, you can make sure you meet all your tax obligations.

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