📝 Overview
Payroll taxes are taxes that employers withhold from workers' paychecks and taxes that employers pay directly to federal, state, and local tax agencies. This article covers the most common employee and employer payroll taxes and how each is calculated.
🧑💻 Employee Taxes
An employee's gross pay is the total amount earned before taxes and deductions are subtracted. The amount remaining after those deductions is net pay. Common employee taxes include:
Federal Income Tax: A federal tax based on the employee's income across layered tax brackets. Employers withhold this amount from each paycheck based on the information the employee provides on their Form W-4.
Social Security Tax: Paid by both the employee and the employer at the same rate, applied to wages up to an annual cap that adjusts periodically. See the employer taxes section below for rate details.
Medicare Tax: A federal payroll tax paid by both the employee and employer at the same rate, with no wage cap. See the employer taxes section below for rate details.
Additional Medicare Tax: Employees earning above a certain threshold may owe an additional 0.9% on wages exceeding that amount. This portion is the employee's responsibility only.
State Income Tax: Similar in structure to federal income tax, but rates and calculations vary by state. A small number of states do not impose a state income tax.
Paid Family and Medical Leave: Some states require employees and/or employers to contribute to a state leave fund.
Local Taxes: Depending on the jurisdiction, there may be additional city or county taxes calculated on an employee's gross income.
⚙️ Employer Taxes
In addition to the amounts withheld from worker paychecks, employers pay their own separate payroll taxes. Common employer taxes include:
Federal Unemployment Tax (FUTA): An employer-only tax that funds federal unemployment benefits. See the FUTA section below for full details.
State Unemployment Tax (SUI/SUTA): State unemployment tax rates vary by state and can change year over year. Each state assigns a rate to your business based on your history.
Social Security Tax: The employer pays 6.2% on each employee's wages, up to the annual wage cap. This matches the employee's contribution rate.
Medicare Tax: The employer pays 1.45% on all employee wages, with no cap. This matches the employee's contribution rate.
Paid Family and Medical Leave: Some states require employer contributions to a state leave fund, in addition to or instead of employee contributions.
Local Taxes: Depending on the jurisdiction, employers may also owe city or county-level payroll taxes.
🔑 FICA Tax
FICA stands for the Federal Insurance Contributions Act. It is the combined term for the Social Security and Medicare taxes paid by both employees and employers on each paycheck.
Social Security: Both the employee and employer each contribute 6.2% of the employee's wages, up to the annual wage base. Wages above that cap are not subject to Social Security tax.
Medicare: Both the employee and employer each contribute 1.45% of all wages, with no cap. Employees earning above a certain threshold also owe an additional 0.9% on wages exceeding that amount. This additional amount is the employee's responsibility only.
💡 When you process payroll through DaySmart Payroll, FICA taxes are calculated automatically for both the employee and employer portions on every paycheck.
🔍 FUTA Tax
The Federal Unemployment Tax Act (FUTA) tax is an employer-only federal payroll tax used to fund unemployment benefits for workers who have lost their jobs. Employees do not contribute to FUTA.
Tax rate: The standard FUTA rate is 6% on the first $7,000 of each employee's wages per calendar year. However, employers who pay their state unemployment taxes (SUI/SUTA) in full and on time are eligible for a federal credit of up to 5.4%, which reduces the effective FUTA rate to 0.6% in most cases.
Reporting: FUTA taxes are reported annually on IRS Form 940.
Liability threshold: You are subject to FUTA if you paid at least $1,500 in wages during any calendar quarter, or if you had one or more employees working during at least 20 different weeks in the current or prior calendar year.
⚠️ Failing to accurately report and pay FUTA taxes can result in penalties and interest charges. DaySmart Payroll handles FUTA calculation and payment as part of payroll processing.
⚠️ FUTA Credit Reduction
In most cases, employers receive a credit of up to 5.4% against their FUTA liability when state unemployment taxes are paid on time, bringing the effective FUTA rate to 0.6%. A FUTA Credit Reduction applies when a state has borrowed money from the federal government to cover its unemployment benefits and has not repaid that loan within the allowed time frame.
When a credit reduction applies, employers in that state receive a smaller credit, which raises their effective FUTA rate. The additional tax owed caps out at a set amount per employee and is assessed at the end of the calendar year.
💡 For the current calendar year, the states subject to a FUTA Credit Reduction are California (1.2%) and the U.S. Virgin Islands. DaySmart Payroll will notify affected employers of the amount owed and process the debit the following week.
⚠️ The list of states subject to FUTA Credit Reduction can change each year. Refer to the IRS FUTA Credit Reduction page in the link below for the most current information.
❓ Frequently Asked Questions (FAQs)
Find answers to common questions or additional details that may not be covered in the main instructions.
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What is the difference between employee taxes and employer taxes?
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Employee taxes are withheld directly from a worker's paycheck and remitted to the appropriate tax agency on their behalf. Employer taxes are separate obligations paid by the business on top of wages, and they are not deducted from the worker's pay. Some taxes, like Social Security and Medicare, are shared: both the employee and employer each contribute their own portion.
What is FICA tax and how is it calculated?
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FICA is the combined term for Social Security and Medicare taxes. Both the employee and employer each pay 6.2% for Social Security (up to the annual wage base) and 1.45% for Medicare on all wages. Employees earning above a certain threshold also owe an additional 0.9% Medicare tax on wages above that amount, which is their responsibility only. DaySmart Payroll calculates both the employee and employer FICA portions automatically on every paycheck.
Is FUTA deducted from my employees' paychecks?
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No. FUTA is an employer-only tax. It is never deducted from your employees' wages.
How do I know if my state has a FUTA Credit Reduction?
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The IRS publishes the list of affected states each year. You can check the current list on the IRS FUTA Credit Reduction page in the link below. If your state is affected, DaySmart Payroll will notify you and process the additional amount owed at year end.
Can my SUI rate change from year to year?
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Yes. State unemployment tax rates are assigned by each state individually and can be updated annually based on factors like your business's claims history and the state's unemployment fund balance. Check with your state unemployment agency or review your annual rate notice if you believe your rate has changed.
Do all states have state income tax?
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No. A small number of states do not impose a state income tax on wages. If your workers are based in one of those states, state income tax withholding does not apply to them. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming currently do not have a state income tax on wages.