Employers have many responsibilities to their workforce. Some, such as stock options or commuter stipends, are optional perks to attract top talent and improve job satisfaction. Others, like payroll taxes, are mandatory liabilities closely regulated by federal and state tax authorities.
How much payroll tax are employers obligated to contribute in the U.S.? Unfortunately, there is no simple answer. Factors like employment status, gross pay, and local regulations all impact how businesses calculate payroll taxes.
What are payroll taxes?
Payroll taxes (sometimes referred to as employment taxes) are mandatory contributions made by employees and employers to finance federal and state programs. Payroll deductions are calculated as a fixed percentage of an employee’s regular earnings to fund Social Security, Medicare, and unemployment insurance.
Unlike state and federal income taxes, which are used to fund a broad range of government services, payroll taxes are specifically earmarked for these programs. Social Security and Medicare taxes are deducted directly from employees’ paychecks, and employers contribute an equivalent amount. Unemployment insurance taxes fall solely on employers.
State and federal income taxes are also automatically withheld from regular employees’ gross wages based on the withholding preferences provided on their W-4 forms. Withholding income taxes from regular paychecks ensures workers’ income tax payments are spread throughout the year rather than paid in a large lump sum at tax filing time. Individuals are responsible for calculating taxes on extra income streams (e.g., investment payouts, rental properties, or independent contractor work).
What payroll taxes do employers pay?
Employers are responsible for matching and paying several different payroll taxes every time they issue a paycheck to an employee. How much federal tax is deducted from the paycheck? Here’s a payroll breakdown:
Social Security tax
Social Security tax is a federal payroll tax that funds retirement, disability, and survivor benefits under the Federal Insurance Contributions Act (FICA). The payroll tax rate for Social Security tax is 6.2% of an employee’s gross wages. Employees also pay this percentage, which employers withhold from their paychecks and deposit on their behalf.
Medicare tax
Medicare tax is another FICA tax that employers and employees pay out equally. It provides health insurance for individuals aged 65 or older and those with certain disabilities. The current Medicare tax rate for employers is 1.45% of every employee’s gross wage. Employees are responsible for the same tax rate, which payroll automatically withholds each pay period.
Employees who earn more than $200,000 must pay additional Medicare tax. A 0.9% tax rate is applied, although it varies depending on specific thresholds—$250,000 for joint filers, $125,000 for married people who file separately, and $200,000 for other filers. Employers do not match the additional Medicare tax, but they’re responsible for calculating and withholding taxes each pay period.
Federal unemployment tax
Federal unemployment tax (also referred to as FUTA tax) helps fund unemployment benefits at the federal level. Unlike FICA taxes, federal unemployment taxes are solely the employer’s responsibility. Employers must pay 6% of the first $7,000 of each employee’s annual wages. Many organizations are eligible for tax credits of 5.4% on federal unemployment tax, which can reduce their FUTA liability to 0.6%.
State unemployment tax
State unemployment taxes (aka SUTA taxes) provide unemployment benefits at the state level. Tax rates and wage limits vary from state to state and can also be impacted by an individual employer’s history of unemployment claims. Payroll must check with each state where they employ workers to calculate the correct SUTA tax.
Additional payroll deductions
In addition to required employer payroll taxes, employers may be responsible for several other payroll deductions. These include:
- Workers’ compensation insurance: This insurance covers employees who are injured on the job or become ill due to work-related activities. Premiums vary by state and industry, and employers typically pay based on risk classification and claims history.
- State disability insurance: Some states have state-mandated disability insurance, including California, Rhode Island, New Jersey, New York, and Hawaii. Although programs vary by state, SDI provides short-term disability benefits for workers who can’t work due to a non-work-related injury or illness. Employers might be required to withhold SDI contributions from gross wages and remit them to the state.
- Retirement plan contributions: A retirement fund is a significant benefit for attracting and retaining talent. Contributions to 401(k)s or pensions are automatically deducted from employees’ wages. Employers often match employee contributions up to a certain percentage each pay period.
- Health insurance premiums: Employers who offer health insurance often cover a portion of the premiums, while employees contribute the remainder through payroll deductions. The amount will vary depending on the premium cost and the employer’s contribution level.
- Other voluntary deductions: Organizations with robust total rewards packages might also handle deductions for voluntary benefits, including life insurance, flexible spending accounts (FSAs), or employee stock purchase plans (ESPPs). The deduction amounts are highly individualized, varying based on employee preferences.
Steps to calculate payroll taxes
Need to build out best practices to accurately calculate payroll taxes each pay period? Here’s an easy six-step process:
1. Update employee information
Start by reviewing and updating your employees’ gross pay, including base salary, overtime, bonuses, and any other compensation. Exact compensation figures are crucial since they determine the amount of payroll taxes due.
Ensure that you properly categorize every worker. Employers are responsible for regular employees’ tax withholdings, but freelancers and independent contractors handle their own federal tax returns, including Medicare tax, Social Security tax, and self-employment tax.
2. Estimate the projected income tax withholding
Use employees’ up-to-date W-4 forms to estimate federal and state income tax withholdings. An employee’s filing status, number of dependents, and additional withholding amounts (specified on their form) will impact payroll tax calculations. Although employees aren’t required to fill out a new W-4 for every new tax year, an annual review ensures that any changes (e.g., marriage, divorce, parenthood, or income adjustment) are accounted for.
3. Add tax credits
The IRS and state tax authorities offer several tax credits and adjustments that may reduce the amount of tax withheld. This may include credits for retirement contributions or health savings accounts.
Tax credits can result in major savings, potentially lowering employees’ total tax liability and increasing their take-home pay.
4. Determine the payroll tax contributions
Calculate each employee’s required contributions, applying the correct payroll tax rates to their gross wages. Be sure to account for mandatory federal payroll taxes (Social Security, Medicare, and federal unemployment tax), state liabilities, and voluntary payroll deductions.
5. Calculate the withholding amount
Combine all calculated amounts and subtract from the employee’s gross pay. This will determine each employee’s net pay, which is the amount they receive after all the deductions.
6. Pay using the Electronic Federal Tax Payment System
Organizations pay federal payroll taxes online using the Electronic Federal Tax Payment System. Federal payroll taxes are paid as soon as they’re withheld from wages. Depending on your pay period, you may deposit withholdings for payroll taxes alongside your own tax contributions.
Consequences of a late federal tax payment
The IRS doesn’t offer very much wiggle room. Any unpaid federal tax payment will incur a fine. “Failure to Deposit” penalties are calculated based on how late your payroll taxes are deposited.
Currently, the IRS charges the following “failure to deposit” penalties:
- A 2% penalty of your total deposit will be applied for payments deposited 1–5 calendar days late
- A 6% penalty of your total deposit will be applied for payments deposited 6–15 calendar days late
- A 10% penalty of your total deposit will be applied for payments deposited more than 15 calendar days late
- A 15% penalty of your total deposit will be applied for payments deposited more than 10 calendar days after your first notice
Oyster offers expert support for payroll taxes
Payroll is likely one of your largest expenses. With deposits due every single month, inaccurate systems and manual processes can weigh down your bottom line—and put you at risk of significant penalties. Professional payroll services automate the entire process so you can focus on your organization’s goals.
Try out Oyster’s global payroll services today. Our employment platform ensures international compliance in more than 180 countries worldwide.
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About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
