Payroll taxes refer to tax amounts that are deducted from an employee’s pay or contributed by the employer, and remitted on the employee’s behalf.
There are several different kinds of payroll taxes: federal, state, and local taxes, as well as other taxes paid by the employer only.
Federal Payroll Taxes
Federal payroll tax, generally deducted from each paycheck, consists of several parts: income tax, Social Security, and Medicare.
Employers are required to deduct income tax from an employee’s paycheck. The percentage of federal income tax withheld from the employee’s pay depends on exemptions the employee claims on Form W-4, the Employee Statement of Withholding. Employers can figure federal payroll taxes by hand using Circular E, Employer’s Tax Guide or use a payroll tax application to automatically calculate the amount of income tax deducted.
For both Social Security and Medicare, the employer is required to contribute a matching share to help fund the employee’s accounts. For example, the employer deducts 1.45 percent from the employee’s pay to fund Medicare, but the employer also contributes the same percentage. The same is true for Social Security; however, rates for the employee share of Social Security have changed recently as a result of payroll tax cuts. Currently, employees and employers contribute a matching 6.2% to Social Security.
All federal payroll taxes withheld from an employee’s paycheck and/or matched by the employer become a payroll tax liability that the employer must remit to the appropriate taxing agency. Federal payroll tax liabilities, including Social Security, Medicare, and federal income tax, must be paid via the Electronic Federal Tax Payment System, or EFTPS.
Many employers pay these federal payroll taxes on a monthly basis, with a report due each quarter (Form 941). The Internal Revenue Service may revise an employer’s payroll tax deposit frequency at its discretion based on payroll amounts during a certain time period, or a lookback period.
State and Local Payroll Taxes
Other payroll taxes deducted from an employee’s paycheck include state income tax, local income tax, or school district taxes. Some states or localities may have additional payroll taxes exclusive to their area only. Small business owners withhold these payroll taxes on behalf of the employee and forward the amounts to the taxing agencies.
Employers can contact their state and locality to find out their applicable rates. Employers can use a payroll solution that automatically looks up applicable taxes according to the zip code and tax jurisdiction of the employee’s address.
Other Payroll Taxes
There are other types of payroll taxes that only employers pay, including state unemployment and federal unemployment (SUTA/FUTA). These amounts are not deducted from the employee’s paycheck, but are a liability the employer must pay. A payroll system will be automatically calculating this for small business owners. For more information, read What is FUTA?
The following chart illustrates the most common types of payroll taxes and how they are funded:
|Payroll Tax Liability||Type of Liability|
|Federal Income Tax||Employee-funded|
|Social Security|| Employee-funded (6.2%)
Employer match (6.2%)
|Medicare|| Employee-funded (1.45%)
Employer match (1.45%)
|State income tax||Employee-funded|
|Local income tax||Employee-funded|
For more information on federal payroll taxes, refer to the Internal Revenue Service. For information on state taxes, refer to Patriot Software’s state-by-state payroll tax information page and click on your state to see a list of your state’s taxes.
If you’re interested in automating your payroll tax filing, consider using Patriot Software’s Full Service Payroll. We update the payroll taxes for you and file all federal state and local payroll taxes, on time, guaranteed. Try it today!