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Employers need to withhold and remit several payroll taxes from employee wages.

What Are Payroll Taxes? – Payroll Tax Rates and More

As an employer, it might seem like you are surrounded by tax liabilities. If you don’t have an accountant, in-house payroll manager, or payroll services, you may feel overwhelmed and confused by all of the different payroll tax rates that you’re responsible for.

What are payroll taxes?

Payroll taxes are tax amounts either withheld from an employee’s pay or contributed by the employer. Payroll taxes are usually calculated by applying both the employee and employer payroll tax rates to an employee’s wages. Payroll taxes include income, social security and medicare taxes, unemployment taxes, and can be enforced by federal, state, or local governments.

Payroll Tax Rates

Payroll tax rates are composed of income taxes, social security and medicare taxes, and unemployment taxes.

Income taxes

Employers are required to deduct income tax from an employee’s paycheck.

For federal income taxes, the percentage withheld depends on how many exemptions the employee claims on Form W-4, Employee’s Withholding Allowance Certificate. Employers can calculate federal payroll taxes by hand using Publication 15 (Circular E), Employer’s Tax Guide or calculate them automatically by using payroll software.

The employer must turn in federal income taxes using the Electronic Federal Tax Payment System (EFTPS). Many employers pay these federal payroll taxes on a monthly basis. The IRS may revise an employer’s payroll tax deposit frequency based on payroll amounts during a certain time period, called a lookback period. Many employers must also file a quarterly report on IRS Form 941, Employer’s Quarterly Federal Tax Return.

Most states also enforce state income tax. Some states use a flat rate for all employees, while some states use tax brackets with varying rates.

There are also several states that have localities with income taxes. Local income taxes can use a flat rate, varying rates, or can be taken from the state income tax.

Social Security and Medicare taxes

Social Security and Medicare taxes combined are called FICA (Federal Insurance Contributions Act). For both taxes, the employee and employer pay matching payroll tax rates. FICA is a flat rate of 15.3% for 2015 and 2016.

Social Security tax alone is a flat rate of 12.4% for 2015 and 2016. The employer withholds 6.2% from the employee’s wages and the employer contributes 6.2%.

Medicare tax alone is a 2.9% flat rate for 2015 and 2016. The employer pays 1.45% and withholds 1.45% from the employee’s pay.

The employer should turn in FICA taxes using the EFTPS. They should also turn in a quarterly Form 941.

Unemployment taxes

Unemployment taxes are paid by the employer only. The employer has to pay both federal unemployment tax (FUTA) and state unemployment tax (SUTA).

For FUTA, the tax has a 6% flat rate and is applied to only the first $7,000 paid to each employee in a calendar year. SUTA works the same way, but tax rates and taxable portion limits are set by each state.

For more information on payroll taxes and payroll tax rates

To learn more about federal payroll taxes, refer to the Internal Revenue Service. For more information on state and local taxes, visit Patriot Software’s state-by-state payroll information for employers page and click on your state to see your state’s taxes.

If you want to reduce the stress of  your payroll tax filing, consider using one of Patriot Software’s online payroll options. Our Full Service Payroll solution will update the payroll taxes for you and file all federal, state, and local payroll taxes—on time, guaranteed. Try it today!

This article was republished on 10/20/2015 to reflect current information. (Original publication was 2/28/2012.)


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