What Are Payroll Taxes?

Payroll taxes are taxes levied by federal, state and local governments, paid by an employer on behalf of their employees. The exact amount is based on a percentage of the salaries and wages of employees and is paid to the Internal Revenue Service (IRS). Most of these funds are often used to finance specific social insurance programs, whereas income tax goes to the government’s general fund.

As an employer, you're responsible for paying a variety of taxes.

While this might not be your favorite aspect of being a small business owner, understanding it is essential to running a successful business. Employers pay federal and state unemployment taxes, which are governed by the Federal Unemployment Tax Act (FUTA). States have differing state unemployment insurance (SUI) programs.

Employees must also contribute to some payroll taxes, though not as much as the employers. The sum of Social Security and Medicare taxes are both split between employees and employers.

Some elements of payroll taxes (like Social Security) are capped at a certain limit every year. The actual amount you'll owe the IRS depends on several factors, so be sure to consult with a tax professional.

Where Do Payroll Taxes Go?

Example of Employer Cost Breakdown

Total payroll cost: $TK
8% Federal unemployment taxes
8% State unemployment taxes
8% Medicare
8% Social security
8% Local taxes

Example of Employee Cost Breakdown

8% Medicare
8% Social security
8% Local taxes
8% Other taxes (income tax and employee deductions)

How to File Your Payroll Taxes

1

Enter the payroll information into Incfile’s easy Employer Payroll Tax Calculator.

2

Prepare your FICA taxes (Medicare and Social Security) monthly or semi-weekly, depending on your business’s tax liability.

3

Deposit FUTA taxes (Federal Unemployment Tax) quarterly.

4

Pay your federal payroll taxes online via the Electronic Federal Tax Payment System.

5

Check with the IRS for ways to pay your local and state payroll taxes (varies by state).

Starting a Business?

Get the tools to launch your company with Incfile’s employer toolkit.

When building a business, seemingly small mistakes can end up costing a lot. Understanding federal tax rates, post-tax deductions, and how to accurately calculate employer payroll taxes can save time and money. Learn the ins-and-outs of employer taxes and much more with our practical start-up guides.

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Other Frequently Asked Questions About Payroll Taxes

How much does an employer pay in payroll tax?

Payroll taxes aren't a fixed dollar amount, but a percentage of each employee's gross taxable wages. So how much you end up shelling out in payroll taxes depends how many people you employ and how much you pay them. Payroll tax actually includes two different taxes—Social Security and Medicare— folded into one, known as the Federal Insurance Contributions Act (FICA). Social Security accounts for 12.4% of payroll tax and Medicare is 2.9%, totaling 15.3%. This is split between the employer and employee, with each owing 7.65% of an employee's gross taxable wage.

What are the four payroll taxes an employer must pay?

Whether you're running a C corp, S corp or an LLC, a small business or a micro-business, if you're an employer then you are responsible for paying four kinds of taxes: Federal Income Tax, Social Security and Medicare Taxes, Additional Medicare Tax, and Federal Unemployment Tax (FUTA). At the end of the fiscal year, employers are required to file a W-2 Wage and Tax Statement with the IRS to report all compensation that's been paid to an employee—including wages and tips. The employee pays a percentage through a payroll deduction and the employer pays the rest.

What payroll taxes does an employer have to match?

You are also required to pay a matching amount of social security and Medicare taxes for your employees and to pay State and Federal unemployment tax. You must pay a matching amount of FICA taxes, which consists of Social Security and Medicare taxes. Up to the Social Security wage base, which varies by year. Both the employer and the employee continue to pay Medicare tax, no matter how much is earned.

How can I avoid payroll tax penalties?

There are easy ways to avoid getting dinged for careless tax mistakes. Stay informed and diligent with these tips:

  • Accurately classify your employees. Employees are classified according to their hours and duration of their job, such as full-time, part-time, temporary or seasonal. Make sure that you classify employees versus independent contractors correctly.
  • Stay in the loop. Wage base limits and tax rates can change annually. Make sure you’re up-to-date on the most current rates.
  • Pay your taxes on time. Be sure that you pay all payroll taxes by the IRS deadline.
  • Correct your mistakes. Mistakes happen. If you make one, be sure to amend it immediately using the correct form.
  • Use your resources. It’s easy for small business owners to take on more than they can handle, which leaves room for error. Partner with reputable tax professionals and use Incfile’s online resources to help you understand and navigate your taxes.
What are the tax benefits of forming an LLC?

Structuring your business as an LLC lets business owners choose different ways their business is taxed. LLCs are taxed as sole proprietorships, under which you have several options that may affect your employment taxes. Some LLC structures can help you avoid paying double taxes, and optimize your business expenses. LLC tax regulations vary by state so check out our state-by-state LLC formation guides, which include information on state taxes.

LLC formation guides