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Guide to Employer Payroll Taxes
A business must understand how payroll works and be able to implement it correctly, complying with all regulations.
Table of Contents
You’ve taken the time to write a business plan, streamline day-to-day operations and staff your business with the right people. However, one of the tasks that can make or break a successful employer is payroll. It’s critical to understand how payroll taxes work and comply with regulations.
Whether you file payroll taxes yourself or use one of the best payroll companies, we’ve got you covered. This quick reference guide provides a thorough overview of completing payroll taxes accurately and on time.
Editor’s note: Looking for the right payroll software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
What are payroll taxes?
Payroll taxes are the taxes paid on your employees’ hourly wages and salaries. Additionally, these taxes fund Social Security and Medicare. According to the United States Department of the Treasury, so far in 2024, individual income taxes make up 51 percent of total revenue while Social Security and Medicare make up an additional 34 percent.
As a significant source of government revenue, half of the payroll taxes are paid by employers (7.65 percent) and the other 7.65 percent is debited directly from employee paychecks. While the employer and employee share payroll taxes, most of the cost is passed on to the employee.
What are the types of payroll taxes?
These are the four main payroll tax categories:
- Federal income tax
- Federal payroll tax
- Self-employment tax
- Federal Unemployment Tax Act (FUTA) tax
See our in-depth guide below outlining the four different types of payroll taxes and how to calculate them.
Mandatory and optional payroll tax responsibilities
You are liable for these mandatory and tax responsibilities for your company:
- Income tax withholding
- Quarterly declarations of income tax withholding and federal payroll tax
- Annual reporting of Social Security and employees’ tax payments
- FUTA
- State-level reporting
Here are some of the voluntary tax responsibilities you can opt for:
- 401(k) employer-sponsored plans or other retirement funding
- Flexible spending accounts
- Wage garnishments, such as child support
How to calculate employer payroll taxes
Consider these aspects of your business when calculating payroll taxes:
- Taxable workers: These employees are subject to employer payroll taxes while independent contractors pay their own taxes.
- Taxable wages: Taxable wages include salary, bonuses and gifts.
- Quantify withholding amounts: You’ll do this for federal, state and local taxes.
We describe the main payroll tax types in more detail below.
Federal Insurance Contributions Act (FICA) tax
FICA is the combined federal payroll tax that includes Social Security and Medicare. You will pay the same combined rate as your workers: 7.65 percent. The following is a breakdown of the FICA taxes for Social Security and Medicare.
You pay a 6.2 percent tax rate for each employee for your company toward Social Security while each staff member also pays 6.2 percent for Social Security. The 6.2 percent rate is based on the employee’s gross taxable wages. Once your associate reaches $168,600 (up from the 2023 limit of $160,200) in gross taxable wages for 2024, you no longer have to withhold Social Security taxes or contribute Social Security taxes for that employee.
You must pay a 1.45 percent tax rate for each employee for Medicare while your worker also pays 1.45 percent. This rate is based on the employee’s gross taxable wages.
There is no wage base for Medicare tax. Consequently, once an employee reaches a certain wage threshold, they must pay an additional 0.9 percent in Medicare taxes based on their filing status. The 2024 thresholds are $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately).
Self-employment tax
When you are self-employed, you’re considered both an employer and an employee. Consequently, you must pay both parts of FICA ― 15.3 percent ― toward Social Security and Medicare. This combined tax is also known as the Self-Employment Contributions Act (SECA) tax.
Of the total 15.3 percent in SECA taxes, 12.4 percent goes to Social Security and 2.9 percent is paid to Medicare. If you are filing as self-employed, you must pay Social Security tax until you earn $142,800 annually. After meeting that threshold, you no longer owe money in Social Security taxes.
You are also subject to the same rules as FICA regarding Medicare taxes. Once you reach the wage threshold of $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately), you are required to pay an additional 0.9 percent in Medicare taxes.
Filing Schedule SE (Form 1040) can help you estimate self-employment taxes.
FUTA tax
While the FUTA tax is the same for all employers at 6 percent, the State Unemployment Tax Act tax varies from state to state. States can charge fees for administrative costs and job training. You’ll receive a percentage range based on your employment history and how often your workers collect unemployment.
Payroll tax FAQs
- Monthly deposits: Monthly deposits are made by the 15th day of the following month. For example, all April employment taxes must be paid by May 15.
- Semiweekly deposits: Semiweekly payments made on a Wednesday, Thursday or Friday are deposited by the following Wednesday. Payments made on Saturday, Sunday, Monday or Tuesday should be completed by the following Friday.
Federal income tax and FICA
Here are the forms you need to file for federal income tax and FICA:- Form 941: As the Employer’s Quarterly Federal Tax Return, Form 941 is filed each quarter with information on sick pay withholding and supplemental unemployment benefits. The reporting due dates are April 30, July 31, October 31 and January 31.
- Form 943: The Employer’s Annual Federal Tax Return for Agricultural Employees is used to report agricultural wages. The reporting due date is January 31.
- Form 944: The Employer’s Annual Federal Tax Return is for employers whose annual tax liability is $1,000 or less. The reporting due date is January 31.
- Form 945: The Annual Return of Withheld Federal Income Tax is filed to report backup withholding. The reporting due date is January 31.
- Form W-2: The Wage and Tax Statement reports wages, tips and other employee compensation. The reporting due date is January 31.
- Form W-3: The Transmittal of Wage and Tax Statements sends W-2 information to the Social Security Administration. The reporting due date is January 31.
Self-employment
Self-employed individuals who own a business file taxes as a sole proprietor or independent contractor. You may also fall under the self-employed umbrella if you are a member of a partnership that owns a trade or company or if you’re in business for yourself ― part-time or full-time. Self-employed individuals pay an income tax and a self-employment tax that covers their Social Security and Medicare tax contributions. You can determine if you are subject to self-employment and income taxes and whether your business made a profit or loss. To calculate your business profit or net loss, subtract your business expenses from your company income. Then, report your findings on Form 1040 or 1040-SR. Here are the forms you’ll need if you’re self-employed:- Form 1040-ES: The Estimated Tax for Individuals form helps you estimate your income taxes and FICA since you have both the employer and employee tax responsibilities.
- Schedule C: The Profit or Loss From Business form is for annual tax returns, as it calculates your business profit or loss.
- Schedule SE: The Self-Employment Tax form is for the calculation of FICA. It includes Form 1040 or 1040-SR.
FUTA
When you file your FUTA return, you’ll need Form 940.- Form 940: FUTA is only paid by the employer. The reporting due date is January 31.
- January 31 or February 1: If January 31 falls on a Sunday, then all quarterly filings for Q4 and year-end filings are due on February 1.
- April 30: This is when Q1 quarterly filings are due.
- August 2: This is when Q2 quarterly filings are due.
- November 1: This is when Q3 quarterly filings are due.
- 15th of every month: If the 15th day of the month falls on a weekend, payroll tax payments for the previous month are due on the following Monday. For example, you should submit your payroll tax payments for March on April 15.
The best payroll software for managing payroll taxes.
At business.com, we researched the best payroll software to find options for small businesses.
We examined several essential factors, such as automation, compliance and customer service options. We selected the following payroll software as our best picks:
- ADP. We chose ADP since it can automate payroll tax calculations and filings. ADP will pay fines or penalties for any tax error on their part. The platform will even communicate with government agencies on your behalf and provide customer support when you have compliance questions. Learn more in our review of ADP.
- Rippling. We selected Rippling for its 100 percent error-free guarantee when overseeing tax filing paperwork. Rippling automatically calculates and files payroll taxes so your human resources team minimizes errors. Employees can sign and update tax documents through a central online portal. Learn more in our review of Rippling.
- OnPay. We picked OnPay, which can handle computer payroll taxes and withholdings with ease. The software can submit tax forms to the appropriate agencies, both annually and quarterly. OnPay can process unemployment insurance payments, company contributions and deduct garnishments with two clicks. Learn more in our review of OnPay.
