The Employer's Guide to Payroll Taxes

Employer payroll taxes are the federal and state taxes you withhold from employees’ wages and pay from your own funds to support Social Security, Medicare, and unemployment programs. Managing payroll taxes paid by the employer is one of the more complex aspects of running a business. But it’s a responsibility that every business owner must get right. To help you stay compliant, let’s review some payroll tax basics.

Employers must generally deposit employment taxes on a monthly or semiweekly schedule and file employment tax returns quarterly. These taxes include withholding from employees’ paychecks to cover income taxes (federal and, where applicable, state and local) and employees’ share of Social Security and Medicare taxes (FICA).

In addition, as an employer, you must contribute your share of FICA and pay federal and state unemployment taxes. Failing to withhold, deposit, or report payroll taxes correctly can lead to significant penalties.

What Is Payroll Tax?

Payroll taxes are federal and state taxes tied to an employee’s taxable compensation. Unlike income tax, which applies to all sources of income and is the largest single source of federal revenue, payroll taxes fund social insurance programs such as Social Security and Medicare and apply only to wages and salaries.

Understanding this distinction, as well as what payroll taxes are paid by employers, is essential for compliance, since payroll taxes follow different rules and deadlines than income tax. Additionally, proper business budgeting requires factoring in both the employer and employee portions of these contributions.

Payroll taxes include several components:

• Income Tax Withholding: Based on the employee’s Form W-4, withheld from their paycheck and paid exclusively by the employee.
• FICA (Federal Insurance Contributions Act): Both employers and employees share FICA equally, which funds Social Security and Medicare. The Social Security portion, called Old-Age, Survivors, and Disability Insurance (OASDI), funds benefits to retirees and others; Medicare funds Part A coverage.
• FUTA (Federal Unemployment Tax Act): Paid by the employer only; FUTA funds unemployment compensation programs.
• State Unemployment Tax: Typically paid by employers, though a few states also require employee contributions.

What Is the Purpose of Payroll Taxes?

Payroll taxes fund vital government programs like Social Security and Medicare, which support retirees, individuals with disabilities, and others. FUTA contributes to unemployment programs that help workers who have lost their jobs.

The amount withheld from each paycheck for income taxes depends on the employee’s W-4 form, which they complete when hired. The IRS recommends that employees review their federal income tax withholding and consider completing a new Form W-4 each year, particularly when their personal or financial circumstances change.

Who Pays What: Employer vs. Employee Payroll Taxes

Payroll tax responsibilities are divided between employees and employers, with each party contributing to different aspects of the tax burden. Employees pay federal income tax and contribute to FICA taxes; employers match employees’ FICA contributions and cover employer-only payroll taxes, such as FUTA and state unemployment taxes.

Employers also manage the administrative side by calculating withholdings, making deposits on a monthly or semiweekly schedule, and filing quarterly and annual reports.

What Payroll Taxes Must Be Paid by Employers?

You’ll encounter several types of payroll taxes, and it’s up to you to calculate, withhold, and deposit all required taxes.

Failing to deduct payroll taxes accurately can result in fines, penalties, and, in severe cases, criminal prosecution or jail time. Employers are also legally liable for unpaid taxes, interest, and penalties if mistakes aren’t corrected in a reasonable time frame.

Federal Income Tax

Income tax withholding from employees’ paychecks helps cover what they’ll owe in federal income taxes for the year, along with their share of Social Security and Medicare (FICA). Some employees may also owe an additional Medicare tax (explained below under “Additional Medicare Tax”).

Most states require employers to withhold state income taxes, except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, which impose no state income tax. Certain cities, such as New York City and Philadelphia, impose local income taxes that can result in additional wage withholdings from employees’ paychecks. In some locations, withholding may also include deductions for short-term disability, paid family leave, and unemployment benefits.

Social Security Tax (FICA)

Employers and employees share Social Security and Medicare taxes (FICA), which fund benefits for retirees, individuals with disabilities, and survivors. You and your employee each pay 6.2% of wages for Social Security, up to an annual wage base limit ($184,500 in 2026), plus 1.45% each for Medicare, with no wage limit.

Federal Unemployment Tax Act (FUTA)

Employers contribute to FUTA to help states pay unemployment benefits to employees who are involuntarily terminated. The tax applies to the first $7,000 of each employee’s wages. The basic FUTA rate is 6%, but employers can receive a state unemployment credit of up to 5.4%, bringing the net federal rate to 0.6% (a maximum of $42 per employee). The credit is reduced in “credit reduction states” that borrowed from the federal government and haven’t repaid their loans.

State Unemployment Tax (SUTA)

States fund unemployment benefits by taxing employers. The rate works like insurance, based on the employer’s claims history: more claims involving former employees mean a higher rate. The state notifies each employer of its specific rate each year, subject to a minimum threshold.

Additional Medicare Tax

When an employee’s compensation exceeds $200,000, employers must withhold an additional 0.9% Medicare tax on income over that threshold.

Thresholds by filing status:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• All others: $200,000

The employee pays the tax, but the employer must calculate and withhold it; the $200,000 withholding trigger applies regardless of filing status.

Workers’ Compensation

Workers’ compensation is a state-mandated insurance program providing medical benefits and wage replacement for work-related injuries or illnesses. It functions as an insurance premium rather than a tax, and most states require employers to carry coverage, paid solely by the employer.

Managing Employer Payroll Taxes

Payroll tax management begins when you hire an employee and continues with each payroll run. Your responsibilities include collecting required onboarding forms, withholding the right taxes from each paycheck, depositing those taxes on time, and filing the required payroll tax returns and reports:

• W-4 Requirements: Each new hire completes Form W-4 and, where required, a state withholding form. These forms determine how much federal and state income tax you withhold from their pay.
• I-9 Requirements: Verify every new hire’s eligibility to work in the U.S. using Form I-9 and keep the completed form on file.
• Ongoing Withholding Responsibilities: Each pay period, calculate federal, state, and local income tax withholding, along with the employee’s share of FICA, based on their withholding elections and pay.
• Depositing Taxes: Deposit payroll taxes according to your assigned monthly or semiweekly schedule. Some small employers may qualify for an annual schedule.
• Filing Requirements: File required payroll tax returns and wage reports with federal and state agencies, including quarterly or annual employment tax returns, annual W-2 reporting, and FUTA reporting.

How to Calculate Employer Payroll Taxes

When calculating paycheck amounts for tax withholding, you must refer to the employee’s W-4 form and other details, such as their salary and any applicable deductions. These factors determine the amount the HR manager or owner should withhold from the paycheck for federal income tax, FICA, and any applicable state or local taxes. Estimate potential FICA employee and employer contributions using the FICA Tip Calculator.

Employers relying on outside payroll service providers, like Paychex, can leave the calculations to the provider. Some employers who do payroll in-house can use IRS Publication 15-T, Federal Income Tax Withholding Methods.

Here is a step-by-step payroll tax calculation process:

1. Calculate gross taxable wages (salary, hourly, bonuses, commissions).
2. Subtract pretax deductions (health premiums, retirement, FSA).
3. Calculate employee withholdings (federal, state, employee FICA: 6.2% + 1.45%).
4. Calculate employer FICA match (6.2% Social Security up to the annual wage base of $184,500 for 2026, and 1.45% Medicare with no limit).
5. Calculate FUTA (0.6% on the first $7,000 of wages).
6. Calculate SUTA (at your state’s rate and wage base).
7. Add additional employer costs (state disability, workers’ comp premiums, local taxes).

Employer Payroll Tax Example

Consider a full-time employee earning $60,000 annually. For this employee, payroll taxes paid by the employer each year include:

• $3,720 in Social Security matching ($60,000 x 0.062 = $3,720)
• $870 in Medicare matching ($60,000 x 0.0145 = $870)
• $42 in FUTA tax (the first $7,000 x 0.006 = $42)
• $75 to $300 in state unemployment tax (depending on your state’s rate and wage base)

This brings your total payroll taxes paid by the employer to roughly $4,707to $4,932 per year, or 7.8% to 8.2% of the employee’s base salary, not including workers’ compensation premiums or state disability (where applicable).

Determining Payroll Deductions and Tax Credits

Employers may be eligible for credits and deductions that reduce payroll tax liability. For example, the research and development (R&D) tax credit allows businesses that invest in innovation to offset some of their payroll taxes. Employers can also deduct contributions to benefits like retirement and health plans.

The Work Opportunity Tax Credit (WOTC) for hiring from target groups lapsed after December 31, 2025, and has not been renewed. Because it has lapsed and been reinstated before, sometimes retroactively, many employers continue to screen new hires and file Form 8850 to preserve eligibility if the credit returns. You can use our Work Opportunity Tax Credit calculator to determine your business’s potential savings.

Consequences of Payroll Tax Noncompliance

If you don’t pay payroll taxes on time, the IRS can charge penalties and interest and, in extreme cases, pursue legal action. Missing payments or making errors can also trigger audits, which may lead to additional fines. In some cases, employers may be personally liable for unpaid taxes.

Staying on top of your payroll tax obligations helps you avoid these costly issues and keeps your business in good standing.

Overview of Tax Returns and Deposits

Employers must file employment-related tax returns and deposit employment taxes according to set deadlines. If they don’t do it on time, they may be subject to penalties for failure to file and failure to pay. Additionally, any “responsible persons” in the company who fail to deposit trust fund taxes (amounts withheld from employees’ paychecks) can be held 100% personally liable.

This trust fund recovery penalty applies when someone with the authority to make payment decisions willfully neglects to deposit these taxes. Given the severity of these penalties, employers must get things right.

Tax Returns

Employers are responsible for filing several tax returns related to employment taxes. Depending on your situation, these can include Form 940 for annual FUTA tax, Form 941 for the employer’s quarterly tax reporting and FICA taxes, Form 943 for agricultural employees, Form 944 for eligible small employers who file annually, and Form 945 for nonpayroll payments.

Employers must also report withholding to employees and the Social Security Administration (SSA) annually on Form W-2. Form W-3 is filed with the SSA as a summary of all W-2s.

Employer Tax Deposits

Employers must deposit all payroll taxes with the government by specific deadlines set by the IRS. Additionally, the IRS requires employers to deposit all payroll taxes electronically, either through their business tax account, Direct Pay for Businesses, or the Electronic Federal Tax Payment System (EFTPS).

You can submit some payments with either Form 941 or Form 944, depending on certain criteria. For more details, refer to the section on Depositing Taxes in IRS Circular E (pages 31 to 37 in the 2026 guide).

Filing Employer Tax Returns

Employers must file returns by set deadlines. In most cases, employer tax returns are filed electronically through an authorized e-file provider or payroll software purchased specifically for this purpose.

How Often Do I Have to File Taxes?

Most employers’ tax returns are filed annually. However, the employer’s federal return (Form 941) must be filed quarterly.

States have their own filing schedules for their returns. Be sure to check with your state’s tax, revenue, or finance department for specific deadlines.

How Much Should I Withhold?

It’s up to the employer to calculate the correct withholding amount based on an employee’s submitted Form W-4. A revised Form W-4 took effect in 2020, but existing employees don’t need to submit new forms, and employers can determine withholding based on any previous versions on file. However, if an employee’s tax status changes and they want to adjust the amount of their claimed deductions (and associated tax withholdings), they must submit an updated Form W-4.

Withholding Forms

You must have employees complete Form W-4, Employee’s Withholding Certificate, and, where applicable, state and local withholding forms when you hire them. This way, you’ll have all the information needed to compute withholding correctly.

For new employees, employers must require them to complete Form I-9 to verify they are legally eligible to work in the U.S. It’s also a good idea for employers to have employees complete Form 8850, which is a form employers must submit to the state workforce agency to determine whether the new employee falls within a targeted group that entitles the employer to a Work Opportunity Tax Credit (WOTC). As noted above, the WOTC lapsed after December 31, 2025, and remains unrenewed, but submitting Form 8850 preserves eligibility if the credit is reinstated.

Once I’ve Calculated My Business Employment Taxes, How Do I Submit Them?

You must deposit payroll taxes electronically through the Electronic Federal Tax Payment System (EFTPS). Small employers permitted to pay employment taxes annually can opt to use EFTPS.

For state employment taxes, check your state’s tax department to determine how to deposit employment taxes.

When Are Employee Payroll Taxes Paid?

Timing depends on total tax liability during a four-quarter lookback period (July 1 to June 30).

• Liabilities of $50,000 or less are paid on a monthly schedule (by the 15th of the following month).
• Liabilities above $50,000 use a semiweekly schedule (Wednesday-through-Friday paydays deposit the following Wednesday; Saturday-through-Tuesday paydays deposit the following Friday).
• Employers who accumulate $100,000 or more in a single day must make a next-day deposit and become semiweekly depositors for the rest of that year and the next.

Note: State and local requirements vary.

Common Mistakes Employers Make With Payroll Taxes

Employers can make common payroll tax mistakes, such as calculating incorrect withholdings, missing deposit deadlines, or misclassifying workers as independent contractors. These errors can lead to penalties, interest charges, and compliance issues.

To avoid payroll tax mistakes, understand which payroll taxes are paid by employers and not employees, use up-to-date tax tables, review employee classifications regularly, and stick to a consistent payroll schedule to meet deposit deadlines. You can also reduce errors by automating payroll processes or working with a trusted payroll provider to help manage payroll taxes accurately.

Payroll Tax Recordkeeping and Documentation

To remain compliant with payroll tax regulations, businesses must maintain accurate records. Employers must keep detailed records of employee wages, tax withholdings, deposits, and filed tax returns. The IRS requires you to retain these records for four years after filing the fourth quarter of the year.

Most employers store these documents digitally in a payroll management system, although small businesses may opt to keep paper records of payroll taxes. Hard copies require safe storage, such as a fireproof lockbox. To store these records digitally, you can save them to cloud storage, external hard drives, or both to ensure you have a backup. Solutions like Paychex Flex® Select and Pro can help simplify payroll recordkeeping and tax compliance, so you can stay organized and audit-ready year-round.