The information in this article is up to date through tax year 2025 (taxes filed in 2026).
Payroll taxes are taxes that employers are required to withhold from employees’ wages and pay on their behalf. As a small business owner, you’re responsible for withholding federal income tax, Social Security, and Medicare taxes from employee paychecks, as well as paying the employer’s share of Social Security and Medicare taxes, and federal and state unemployment taxes.
What are payroll taxes?
Payroll taxes are federal taxes paid by the employer and employee to fund government programs including Social Security, Medicare and unemployment compensation. It’s your responsibility as a business owner to withhold these taxes from your employees’ paychecks and send them to the IRS on their behalf.
Federal payroll taxes include Social Security, Medicare (FICA), and federal income tax withholding. Employers are responsible for these and for federal unemployment tax (FUTA). These taxes fund national programs like retirement benefits and unemployment insurance.
State payroll taxes, on the other hand, vary significantly by state. Each state sets its own rates, rules, and filing deadlines. Some states impose income taxes, while others don’t. Most states also require employers to pay state unemployment insurance (SUI), and some may have additional local payroll taxes.
The consequences for not paying payroll taxes or for paying late can be substantial. For instance, the IRS may impose penalties and interest on unpaid amounts. States may also levy fines, revoke business licenses, or take legal action for non-compliance.
Types of payroll taxes and who pays them
When it comes to payroll taxes, both small business owners and their employees share the responsibility. Understanding who pays what is essential for staying compliant and avoiding costly penalties.
Federal Income Tax: You pay these taxes on your employees’ behalf by withholding anywhere between 10% and 37% from their paychecks. The amount you send to the IRS depends on their income and filing status.
FICA Taxes: FICA, which stands for Federal Insurance Contributions Act, is made up of three different taxes:
- Social Security Tax: Both you and your employees are required to pay the Social Security tax. The total percentage that’s sent to the IRS is 12.4%, but it’s split between you and your employees. You withhold 6.2% of your employees’ paychecks, while you match the other 6.2%. In 2025, $176,100 is the maximum amount of income that can be taxed for Social Security.
- Medicare Tax: There’s a flat rate of 2.9% for the Medicare tax. Just like the Social Security tax, you and your employees are obligated to pay it. You take 1.45% out of your employees’ wages and you pay the other 1.45%. Unlike Social Security tax, there’s no cap on the amount of income that can be taxed.
- Additional Medicare Tax: If you or an employee’s income exceeds a certain amount, an additional 0.9% Medicare tax will be imposed on your earnings. Here are the threshold amounts:
- $250,000 – Married filing jointly
- $200,000 – Single, head of household, qualifying widow(er) with dependent child
- $125,000 – Married filing separately
Federal Unemployment Tax Act: The Federal Unemployment Tax Act – also known as FUTA – is a tax used to fund unemployment compensation programs. For FUTA, an employer must pay 6% on the first $7,000 of an employee’s wage. However, employers who pay their SUTA (State Unemployment Tax Act) tax on time and in full can receive a 5.4% credit reduction on their FUTA tax, dropping the rate to 0.6%.
How to calculate payroll taxes
Calculating payroll taxes involves determining the correct amounts to withhold from employee wages and the amounts you, as the employer, must contribute. Here’s how you’ll calculate payroll tax:
- Determine gross pay – Start with the employee’s total earnings for the pay period, including wages, bonuses, and commissions.
- Calculate employee withholdings – Use IRS tax tables to determine federal income tax withholding and apply 6.2% for Social Security (up to the annual wage limit) and 1.45% for Medicare.
- Calculate employer contributions – Match the 6.2% Social Security and 1.45% Medicare taxes. Add any applicable federal (FUTA) and state unemployment taxes (SUTA).
- Add up total payroll taxes – Combine employee withholdings and employer contributions to find the total payroll tax liability.
- Deposit and report taxes – Submit payments to the IRS and state agencies on time, and file required payroll tax forms.
Depending on how many employees are on your payroll, you will make payments to the IRS either on a monthly or semi-weekly basis. You report FICA and federal income taxes on Form 941.
For the FUTA tax, it must be paid on a quarterly basis and reported annually on Form 940. However, if your yearly FUTA tax liability is less than $500, you can include your FUTA tax payments along with Form 940.
How to pay and report payroll tax
Once you’ve calculated your payroll taxes, the next step is to ensure they’re paid and reported correctly and on time. Here’s how to stay on track:
- Determine your deposit schedule – The IRS assigns you a monthly or semiweekly deposit schedule based on your total payroll tax liability from a defined period called the lookback period.
- Make federal tax deposits – Use the Electronic Federal Tax Payment System (EFTPS) to deposit withheld federal income tax, Social Security, and Medicare taxes by your assigned due dates.
- Pay state payroll taxes – Register with your state’s tax agency and follow their specific payment process and schedule for income tax withholding and unemployment insurance.
- File quarterly federal tax returns – Submit Form 941 (or Form 944 annually, if you’re eligible) to report wages paid and taxes withheld.
- Submit year-end forms – At the end of the year, file Form W-2 for each employee and Form W-3 to summarize total wages and taxes. Also, provide copies to your employees by January 31.
- Keep accurate records – Maintain payroll records for at least four years, including payment dates, amounts, and tax filings.
Frequently asked questions about small business payroll taxes
Understanding payroll taxes is essential for small business owners and employees alike. These taxes fund key government programs like Social Security and Medicare, and knowing how they differ from other types of taxes can help you stay compliant and avoid surprises.
What’s the difference between payroll tax and income tax?
Payroll taxes are specifically used to fund programs like Social Security and Medicare and are split between employers and employees. Income taxes, on the other hand, are based on your total earnings and go toward general government funding. They are paid solely by the employee (or individual).
Do payroll taxes apply to all income?
No, payroll taxes do not apply to all income. For example, only wages up to a certain limit ($176,100 in 2025) are subject to the Social Security portion of payroll taxes, while Medicare taxes apply to all earned income with no limit.
How much do employers generally pay in payroll taxes?
Employers typically match the employee’s contributions to Social Security and Medicare, paying 6.2% for Social Security and 1.45% for Medicare. They are also responsible for paying federal and state unemployment taxes, which vary by state and business type.
Do you owe payroll taxes if you’re self-employed?
Yes, self-employed individuals are responsible for paying the full amount of both the employer and employee portions of payroll taxes, otherwise known as the self-employment tax.
