Payroll Taxes - The Basics for Employers

Income Taxes and FICA Taxes

Payroll Taxes Explained
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Payroll taxes are those taxes paid by employees and employers through the payroll process. That is, these taxes are taken out of (withheld from) employee pay, are collected by employers, and paid by employers on behalf of employees and themselves. 

What do payroll taxes include? 

U.S. federal payroll taxes include:

Federal income tax withholding. Taxes withheld from employee pay for federal income taxes(FIT) owed by the employees. The amount of FIT is determined by information employees provide on Form W-4 at hire. This form can be changed by the employee at any time and as often as the employee wishes.

Taxes paid for social security and Medicare, called FICA taxes (FICA stands for "Federal Insurance Contributions Act"). Employees and employers share these FICA taxes, with the employer deducting the employee share (one-half the total due) from employee wages/salaries, and the employer paying the other half.

Payroll taxes also include amounts payable by businesses for FICA tax, which are equal to the amounts paid by employees.

What is the payroll tax process? 

An employer calculates the gross pay for an employee, then, based on the employee's gross pay: 

  • Deducts a specific amount for federal income tax, based on the W-4 form the employee has completed most recently, and
  • Deducts a specific amount for FICA taxes. 

What are the FICA tax withholding rates? 

 The employee tax rate for social security is 6.2%. The employer tax rate for social security is also 6.2% (12.4% total). The Social Security portion of the tax is capped each year at a maximum wage subject to Social Security.

The employee tax rate for Medicare is 1.45% (amount withheld). The employer tax rate for Medicare tax is also 1.45% (2.9% total). Beginning with the 2013 tax year, there is an additional Medicare tax imposed on higher-income individuals. This tax is 0.09%, withheld on income above $200,000 each year. The tax is payable based on the individual's income level and federal tax filing status. 

There is no wage limit for Medicare tax; all covered wages and salaries are subject to Medicare tax.

How do state payroll taxes work?

State payroll tax includes state income tax withholding, for those states which impose income taxes. In addition, other state payroll taxes:

  • State unemployment tax funds
  • State disability funds (California is one of these states)
  • State worker's compensation funds.

State payroll taxes apply to your business depending on where your employees work.

How do employers pay payroll taxes?

The payroll tax process involves several steps. After you have calculated the amounts for federal income tax withholding and FICA taxes and withheld these amounts from employee paychecks: 

  • After the payroll process is complete, you must calculate the amount you, as a business, must pay for FICA taxes, and you must set aside those amounts.
  • Finally, you must make payments to the IRS either monthly or semi-weekly, based on the size of your total employee payroll, and
  • You must report on payroll taxes quarterly using Form 941.