In addition to managing various expenses necessary for running a business, such as payrolls, legal fees, inventory purchases, and others, every employer has a duty to pay taxes to the government.
These taxes, commonly known as “payroll taxes”, as they are based on employees’ wages, are a mandatory contribution to the federal, state, or sometimes even local governments.
As an employer, you’ll have to withhold a certain amount of money from your employee’s wages and pay taxes for each employee that works for you. At the same time, you’ll also have to pay your own share of taxes.
If the concept of payroll taxes confuses you, and you are not sure what your obligations are as a taxpayer, stay tuned.
In this blog post, we’ll:
- Define what payroll taxes are and what they include,
- Tell you which payroll taxes you need to pay as an employer, and
- Explain how to calculate payroll taxes and give you some examples.
Let’s start.
Table of Contents
What are payroll taxes?
According to the Congressional Research Service, “a payroll tax is generally a tax levied on the wages or earnings of workers.”
In other words, when an employee is paid their salary, the employer withholds a certain amount of money from the employee’s wages and pays taxes to the government.
But, employers also have their own share of the payroll taxes they need to pay, which are not deducted from the employee’s gross pay. Meaning, these deductions are not taken from employees’ wages, and the employer pays them out of their own pocket.
Payroll taxes — both employee’s share (taxes deducted from their paycheck) and the employer’s share of these taxes — are used to finance:
- Government expenditure for military equipment, research, education, etc.,
- Social insurance programs such as Social Security and Medicare,
- Unemployment insurance programs,
- Local infrastructure, and more.
The term “payroll taxes” is a broader term that includes both employee payroll taxes and employer payroll taxes. To clarify the difference between each of these terms, we’ll explain:
- Employee payroll taxes,
- Employer payroll taxes, and
- Payroll taxes in more detail.
What is the difference between: Employee payroll taxes, employer payroll taxes, and payroll taxes?
Before we explore employee and employer payroll taxes, let’s get back to the term “payroll taxes” for a moment.
The term “payroll taxes” is an umbrella term that includes all taxes paid by employers and employees to the federal, state, and local governments. Payroll taxes are generally based on the employees’ wages, that is, they are calculated as a percentage of the wages the employer gives to their employees.
Payroll taxes include:
- Employee payroll taxes, and
- Employer payroll taxes.
Employee payroll taxes are taxes withheld by the employer and paid to the IRS on behalf of the employee, and they include:
- Federal income tax,
- FICA taxes (Social Security and Medicare),
- State income tax,
- Self-employment taxes (this applies to the self-employed only), and
- Any local taxes employees may have to pay depending on the city or county they live in (some states don’t impose local or even state income taxes).
Employer payroll taxes are taxes paid solely by employers, and they include:
- Federal Unemployment Tax (FUTA),
- FICA taxes, and
- State unemployment tax (with certain exceptions such as Alaska, New Jersey, and Pennsylvania where employees also contribute to state unemployment taxes).
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Who pays payroll taxes, the employee or the employer?
Both employers and employees have to pay a certain share of taxes.
In most cases, the employer is the one who withholds a certain amount of money from the employee’s wages and pays taxes to the government on behalf of the employee. However, in some instances, for example, if you’re self-employed, you have additional tax obligations, such as the Self-employment tax (SE).
Also, some payroll taxes, such as taxes used to fund social insurance programs (Social Security and Medicare), are paid by both the employer and the employee, and they share them 50/50.
In short, we can conclude the following:
- Some payroll taxes are paid solely by employees (they are taken from their paychecks),
- Some payroll taxes are paid solely by employers, out of their own budget, and
- Some payroll taxes are shared equally between the employer and the employee.
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What is included in employer payroll taxes?
As we’ve learned, employers have certain responsibilities when it comes to paying taxes. In addition to taxes they’re paying on behalf of employees, they also have their own share of taxes they are required to pay — employer payroll taxes.
Let’s break down employer payroll taxes and explain each of them.
Social Security tax
Social Security tax is one of the two Federal Insurance Contributions Act (FICA) taxes.
According to the IRS, Social Security consists of the “old-age, survivors, and disability insurance taxes.” This payroll tax is used to provide monthly funds to help workers and their family members with their income in the event of the worker’s:
- Retirement,
- Disability, or
- Death.
The current tax rate for Social Security is 6.2% of the employee’s wages for the employer.
Again, as the IRS explains, the maximum amount of an employee’s wages that are subject to Social Security taxes per year is $160,200. This is also called a wage base limit.
Medicare tax
As we’ve mentioned, Medicare tax falls under the Federal Insurance Contributions Act (FICA) taxes.
Medicare tax, also known as the “hospital insurance tax,” is used to fund costs for hospital and hospice care for senior citizens or people with disabilities, adequate nursing facility care, and others.
The current tax rate for Medicare is 1.45% of the employee’s wages for the employer.
Medicare tax has no wage base limit.
Federal unemployment tax
The Federal Unemployment Tax Act (FUTA) is a federal law that imposes a tax used to fund benefits for workers who’ve become unemployed.
According to the Internal Revenue Service, the federal unemployment tax rate is 6.0%. The employer is required to pay a tax equal to 6.0% of the first $7,000 paid as wages to each employee during the year.
Still, the federal unemployment tax rate ranges from 0.6% to 6.0%, depending on how much the employer pays in state unemployment tax. If the employer paid the state unemployment taxes in full, and if they did it by the due date of Form 940 they’ve previously filed, they may become entitled to the maximum 5.4% credit, in which case the FUTA tax rate after that credit would be 0.6%.
State unemployment tax
Similar to the Federal Unemployment Tax Act (FUTA), the State Unemployment Tax Act (SUTA) is a law that imposes taxes to finance the cost of state unemployment insurance benefits in the US.
In short, the main difference between the federal unemployment tax (FUTA) and the state unemployment tax (SUTA) is that SUTA imposes taxes at the state level.
According to the US Department of Labor, each US state has its own law that determines state unemployment insurance tax rates for each state.
What is included in employee payroll taxes?
Employee payroll taxes are those taxes that the employer withholds from the wages of employees and pays on behalf of the employee.
To see which payroll taxes are paid by the employee, we’ll state and explain each of these taxes.
Social Security tax
Besides paying their own share of Social Security tax, the employer also needs to withhold the same amount of these taxes from their employee’s wages. The current tax rate for Social Security is:
- 6.2% employer’s share, and
- 6.2% employee’s share.
Medicare tax
The same goes for Medicare tax. Both the employer and the employee pay the same amount of Medicare taxes. The current tax rate for Medicare is:
- 1.45% employer’s share, and
- 1.45% employee’s share.
Also, as the IRS adds, self-employed individuals who earn more than $200,000 in a year are required to pay an additional 0.9% in Medicare taxes.
Federal income tax
Federal income tax is based on the employee’s wages earned during a pay period and the information specified in the employee’s Form W–4, also known as the “Employee’s Withholding Certificate.”
When an employee fills out Form W–4 and forwards it to the employer, the employer will be able to calculate the right amount of taxes they need to take out from the employee’s paycheck.
According to the IRS, federal income taxes are used to finance the:
- US defense system,
- Various social programs,
- Law enforcement,
- Maintenance of the country’s infrastructure, and others.
State income tax
State withholding rules vary from state to state.
Most US states have a state income tax and their own state income tax rates.
According to the US Government, if an employee lives in a state with an income tax, how much of state income tax they will have to pay is based on:
- Their income, and
- The tax rate of that state.
On the other hand, there are 9 US states that have no income tax:
- Alaska,
- Florida,
- Nevada,
- South Dakota,
- Tennessee,
- Texas,
- Wyoming,
- New Hampshire, and
- Washington.
In these states, the only withholding that applies is federal tax withholding.
Local income tax
Any local taxes employees may have to pay depend on the city or county they live in.
In most cases, the employer withholds local income tax from the employee’s paycheck and pays it to the local government. However, in the state of Colorado, 5 cities have a tax called “an occupational privilege tax” that requires employers to pay local taxes too.
These cities are:
- Aurora,
- Denver,
- Glendale,
- Greenwood Village, and
- Sheridan.
Local income tax is used to provide for various public services such as:
- Education,
- Road repairs,
- Garbage maintenance, and similar.
How can an employer calculate the payroll taxes they need to pay (+ examples)?
Now that we’ve explained employer payroll taxes and employee payroll taxes, we’ll show you how to calculate the total payroll taxes you have to pay to the government by following these steps.
Step #1: Calculate your employee’s federal withholding
An employee’s federal withholding mainly depends on:
- Their taxable income and filing status, and
- The other information they provide on their Form W–4, which we’ll cover later in this subheading.
The taxable income is an amount of an employee’s income that is subject to tax. An employee’s filing status can be:
- Single filers,
- Married filing separately,
- Married filing jointly,
- Head of household, and
- Qualifying widow(er) with dependent child.
Some taxpayers whose spouses have passed away may be eligible to use Qualifying widow(er) with dependent child as their filing status. This means that, if they haven’t remarried, they may qualify for joint return tax rates (which may result in lower tax) and use them for two years following the year of their spouse’s death.
To determine your employee’s federal income tax, use the IRS’s wage bracket system.
As the IRS states, the US has 7 federal tax brackets:
- 10%,
- 12%,
- 22%,
- 24%,
- 32%,
- 35%, and
- 37%.
To calculate your employee’s federal withholding, first, you need to determine your employee’s tax bracket.
Take a look at the tables below:
SINGLE FILERS TAX BRACKETS FOR 2023
| Tax rate | Taxable income bracket | Tax owed |
|---|---|---|
| 10% | $0 to $11,000 | 10% of taxable income |
| 12% | $11,001 to $44,725 | $1,100 plus 12% of the amount over $11,000 |
| 22% | $44,726 to $95,375 | $5,147 plus 22% of the amount over $44,725 |
| 24% | $95,376 to $182,100 | $16,290 plus 24% of the amount over $95,375 |
| 32% | $182,101 to $231,250 | $37,104 plus 32% of the amount over $182,100 |
| 35% | $231,251 to $578,125 | $52,832 plus 35% of the amount over $231,250 |
| 37% | $578,126 or more | $174,238.25 plus 37% of the amount over $578,125 |
MARRIED FILING SEPARATELY TAX BRACKETS FOR 2023
| Tax rate | Taxable income bracket | Taxes owed |
|---|---|---|
| 10% | $0 to $11,000 | 10% of taxable income |
| 12% | $11,001 to $44,725 | $1,100 plus 12% of the amount over $11,000 |
| 22% | $44,726 to $95,375 | $5,147 plus 22% of the amount over $44,725 |
| 24% | $95,376 to $182,100 | $16,290 plus 24% of the amount over $95,375 |
| 32% | $182,101 to $231,250 | $37,104 plus 32% of the amount over $182,100 |
| 35% | $231,251 to $346,875 | $52,832 plus 35% of the amount over $231,250 |
| 37% | $346,876 or more | $93,300.75 plus 37% of the amount over $346,875 |
MARRIED FILING JOINTLY TAX BRACKETS FOR 2023
| Tax rate | Taxable income bracket | Taxes owed |
|---|---|---|
| 10% | $0 to $22,000 | 10% of taxable income |
| 12% | $22,001 to $89,450 | $2,200 plus 12% of the amount over $22,000 |
| 22% | $89,451 to $190,750 | $10,294 plus 22% of the amount over $89,450 |
| 24% | $190,751 to $364,200 | $32,580 plus 24% of the amount over $190,750 |
| 32% | $364,201 to $462,500 | $74,208 plus 32% of the amount over $364,200 |
| 35% | $462,501 to $693,750 | $105,664 plus 35% of the amount over $462,500 |
| 37% | $693,751 or more | $186,601.50 + 37% of the amount over $693,750 |
HEAD OF HOUSEHOLD TAX BRACKETS FOR 2023
| Tax rate | Taxable income bracket | Tax owed |
|---|---|---|
| 10% | $0 to $15,700 | 10% of taxable income |
| 12% | $15,701 to $59,850 | $1,570 plus 12% of the amount over $15,700 |
| 22% | $59,851 to $95,350 | $6,868 plus 22% of the amount over $59,850 |
| 24% | $95,351 to $182,100 | $14,678 plus 24% of the amount over $95,350 |
| 32% | $182,101 to $231,250 | $35,498 plus 32% of the amount over $182,100 |
| 35% | $231,251 to $578,100 | $51,226 plus 35% of the amount over $231,250 |
| 37% | $578,101 or more | $172,623.50 plus 37% of the amount over $578,100 |
For example, let’s say your employee Sarah is a single taxpayer whose annual income is $38,000. According to that, Sarah has to pay 10% of the first $11,000 of her income, and the remaining portion of her income is taxed at 12%.
This is a progressive tax system, which means that the more you earn, the higher the tax rate you’ll have to pay.
Other factors you need to consider when calculating your employee’s federal withholding are:
- Multiple job adjustments,
- The amount of credits,
- Deductions, and
- Any additional tax withholdings your employee may request.
After you determine Sarah’s tax bracket and include other factors from her Form W–4, you’ll know how much to withhold from her paycheck.
💡 Clockify Pro Tip
If you want to find out how to tax your employee’s overtime and whether overtime is taxed more than regular pay, read our blog post on the subject:
Step #2: Calculate your and your employee’s FICA taxes
To calculate your employee’s part of FICA taxes, multiply their gross pay by the Social Security and Medicare tax rates.
For example, if your employee earns $800 in a weekly pay period, their Social Security tax would be calculated this way:
$800 in employee’s wages x Social Security tax rate of 6.2% = $49.60 in Social Security taxes you need to withhold from their paycheck
The same principle applies if you want to calculate how much you need to withhold for their part of Medicare tax:
$800 in employee’s wages x Medicare tax rate of 1.45% = $11.60 in Medicare taxes you need to withhold from their paycheck
As the Social Security and Medicare tax rates are the same for the employer and the employee, you’ll follow the same process when calculating your share of Social Security and Medicare taxes.
Step #3: Calculate your FUTA tax
The employer only pays the FUTA tax on the first $7,000 of the employee’s earnings. For any amount of wages that exceed $7,000, you are not required to pay FUTA tax for that employee in that year.
The FUTA tax rate is 6.0% of the employee’s wages. Therefore, you’ll be required to pay 6.0% of an employee’s earnings up to $7,000.
The FUTA tax you’re required to pay for each employee is calculated this way:
$7,000 in the employee’s wages x the FUTA tax rate of 6.0% = $420 in FUTA tax you need to pay
However, if you pay your state unemployment taxes in full and if you do it by the due date of Form 940 you’ve previously filed, you become entitled to the maximum 5.4% credit. In this case, you only have to pay 0.6% of the first $7,000 your employee earns.
Here’s how the calculation goes:
$7,000 in the employee’s wages x the FUTA tax rate of 0.6% = $42 in FUTA tax you need to pay
Step #4: Calculate your SUTA tax
Since each US state has its own SUTA tax rules, the amount you’ll have to pay in SUTA tax depends on:
- The wage base of the state your employee works in — this is the maximum amount of the employee’s wages that an employer can use to calculate SUTA tax per year. An employer is not required to pay SUTA tax on an employee’s income that goes above the wage base in their state.
- The SUTA tax rates of that state — each state has its own minimum and maximum tax rate.
The SUTA tax wage base is the same for all employers in a given state. However, SUTA tax rates are different for each employer as they depend on various factors such as:
- The employer’s previous experience with unemployment,
- The age of their business, and
- The industry turnover.
For example, let’s say your employee works in North Carolina. The taxable wage base for 2023 in North Carolina is $29,600, and this is the maximum amount you can use to calculate your SUTA tax. If your employee earns $50,000 in a year, the only SUTA taxes you need to pay are taxes on the first $29,600. In other words, you don’t pay taxes on any income beyond the taxable wage base.
We’ll also say your SUTA tax rate is a maximum tax rate of 5.76%. When you multiply the tax wage base with a maximum tax rate, you get your SUTA tax:
$29,600 tax wage base x 5.76% maximum tax rate = 1,704.96 in SUTA tax you need to pay
Moreover, in Alaska, New Jersey, and Pennsylvania employees also contribute to state unemployment taxes, so you’ll have to count in their share of SUTA taxes too.
After you’ve covered these 4 steps, your payroll taxes are ready. If you want to see whether you have some additional forms to hand over to the IRS, check this list of employment tax forms.
Wrapping it up: Paying payroll taxes can be easy if you follow our steps for calculating them
Handling taxes is a necessary task for every employer. Employers also have to make sure that each of their employees’ Forms W–4 is valid and updated to avoid any possibility of underpayment.
To successfully pay payroll taxes, an employer has to:
- Deduct the right amount of taxes from employees’ paychecks,
- Calculate their own share of taxes, and
- Follow IRS guidelines regarding due dates and different forms they need to hand over.
If you’re an employer and you’ve been wasting time trying to find the right way to pay payroll taxes, we hope we’ve helped you in that search.
Just make sure to follow each step we’ve explained and calculate your taxes properly.
✉️ Are you an employer and it’s your first time paying taxes? Or are you familiar with payroll taxes and already have a perfect system to calculate and pay them? If you have found the right method to manage payroll taxes, feel free to share it with us at blogfeedback@clockify.me for a chance to be featured in this or one of our upcoming articles. And, if you liked this blog post, share it with someone who might find it useful.
