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, your employer withholds these taxes from your employee pay and remits them on behalf of employees and themselves to the appropriate taxing agencies.

What Do Payroll Taxes Include?

U.S. federal payroll taxes include a few components, as follows:

  • Federal income tax withholding: Taxes withheld from employee pay for federal income taxes owed by the employees. The amount of federal income tax is determined by information employees provide on the Form W-4 they complete when hired. 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's 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. 

Fica Tax Withholding Rates

The employee tax rate for social security is 6.2 percent. The employer tax rate for social security is also 6.2 percent (12.4 percent 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 percent (amount withheld). The employer tax rate for Medicare tax is also 1.45 percent (2.9 percent total). Beginning with the 2013 tax year, there is an additional Medicare tax imposed on higher-income individuals. This tax is 0.09 percent, 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.

State Payroll Taxes

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

  • 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: 

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

If an employer does not remit payroll taxes or sends them in late, the company will be subject to monetary fines. These start at two percent of the past-due amount for payments up to five days late. The penalty increases, up to 15 percent if the company is past 10 days of non-payment, and the IRS has had to send out a payment notice.

If the IRS feels a company has willfully avoided paying its payroll taxes due, the responsible parties may receive jail time for tax evasion, of up to five years, along with a fine of up to $500,000.