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Understanding U.S. Payroll Taxes: What Every Employer Must Know
Payroll taxes might not be the most exciting part of running a business, but they’re definitely one of the most important. If you’re an employer in the United States, understanding payroll taxes isn’t optional — it’s essential. Missteps here can lead to hefty fines, legal trouble, and frustrated employees. In this article, we’ll break down U.S. payroll taxes in a straightforward, human way that any business owner or manager can understand.
What Are Payroll Taxes?
Payroll taxes are taxes employers are required to withhold from employees’ wages and also pay on behalf of their employees. These taxes fund several critical government programs such as Social Security, Medicare, and unemployment insurance.
They generally fall into two categories:
Employee Withholdings: These are taxes withheld from employees’ paychecks. Employers are responsible for collecting and remitting them to the IRS and state tax agencies.
Employer Contributions: These are taxes employers must pay in addition to the amounts withheld from employee pay.
Key Federal Payroll Taxes
Let’s walk through the most common federal payroll taxes.
1. Federal Income Tax Withholding
Employers are required to withhold federal income tax from employee wages based on the information provided on IRS Form W-4. The IRS provides tax tables and formulas to calculate how much to withhold.
Varies by income and W-4 elections
Employers must remit this to the IRS, usually on a semiweekly or monthly schedule
2. FICA Taxes (Social Security and Medicare)
FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare programs. Both the employee and employer contribute.
Social Security Tax: 6.2% from the employee and 6.2% from the employer (total of 12.4%) on wages up to $168,600 (as of 2024).
Medicare Tax: 1.45% from the employee and 1.45% from the employer (total of 2.9%). There is no wage cap on Medicare tax.
Additional Medicare Tax: Employees earning over $200,000 must pay an extra 0.9%, but employers do not match this.
3. Federal Unemployment Tax (FUTA)
FUTA helps fund unemployment compensation programs.
6.0% on the first $7,000 of each employee’s wages
Employers typically get a credit of up to 5.4% for paying state unemployment taxes on time, reducing the rate to 0.6%
Note: Employees do not pay FUTA. This is entirely the employer’s responsibility.
State Payroll Taxes
State payroll taxes vary by location but often include:
State Income Tax: Not all states have it (e.g., Texas, Florida, and Washington do not), but most do. Rates and brackets differ significantly.
State Unemployment Tax (SUTA/SUI): Employers usually pay this. Rates and wage bases vary widely.
Other State-Specific Payroll Taxes: Some states impose additional payroll-related taxes (e.g., California’s Employment Training Tax).
Employers must be aware of their specific state’s rules, including registration requirements, payment deadlines, and reporting obligations.
Local Payroll Taxes
In some places, cities or counties also impose payroll taxes. For example:
New York City: Employers must deal with the Metropolitan Commuter Transportation Mobility Tax (MCTMT).
San Francisco: Has a gross receipts tax that indirectly affects payroll.
Ohio: Local municipalities may have income taxes that employers must withhold and remit.
Local taxes often fly under the radar but can lead to serious compliance issues if ignored.
Payroll Tax Filing and Depositing
Depending on your total payroll and tax liability, you may need to deposit taxes:
Monthly: If your total payroll taxes are less than $50,000 during the lookback period.
Semiweekly: If over $50,000.
Next-day: For $100,000+ in payroll taxes on any single payday.
Key IRS Forms:
Form 941: Filed quarterly to report federal income tax, Social Security, and Medicare taxes.
Form 940: Filed annually for FUTA.
Form W-2: Annual wage and tax statement to employees.
Form W-3: Transmittal of W-2 forms.
Form 1099-NEC: For independent contractors, not employees.
It’s crucial to file these on time. The IRS imposes penalties for late filings and payments, including interest.
Common Payroll Tax Mistakes (and How to Avoid Them)
Even seasoned employers can make mistakes. Here are some of the most common:
1. Misclassifying Workers
Mixing up employees and independent contractors is a big no-no. Employees require tax withholding; contractors do not. Misclassification can lead to back taxes and penalties.
2. Missing Deadlines
Late tax payments or filings lead to interest and penalties. Always mark your calendar or use payroll software to automate reminders.
3. Failing to Keep Records
The IRS requires you to keep employment tax records for at least four years. Make sure you store payroll records, W-2s, and tax filings securely.
4. Incorrect Withholding Calculations
Use the IRS tax tables and keep W-4s up to date. If you use software, make sure it’s updated for the current tax year.
Should You Use a Payroll Service or Do It Yourself?
Handling payroll in-house might save a bit of money upfront, but it also increases your risk of errors. Payroll services like Gusto, ADP, or QuickBooks Payroll handle calculations, filings, and even tax deposits automatically.
Zenithlo, for example, offers automated payroll services integrated with our accounting solutions, ensuring you never miss a deadline and always remain compliant — without lifting a finger.
Final Thoughts
Payroll taxes can be complicated, but they don’t have to be overwhelming. The key is to understand your obligations, keep up with deadlines, and use reliable tools or partners to manage the heavy lifting. Whether you’re a small startup or a growing company, staying compliant with U.S. payroll tax laws protects your business and your employees.
If you’re unsure about any part of the process, it’s always smart to consult with a payroll expert or partner with a firm like Zenithlo that offers end-to-end payroll management. We take care of the details so you can focus on growing your business.