As an employer, you're required to withhold and pay taxes on behalf of your employees. You must withhold Social Security and Medicare taxes, as well as state and federal income taxes, from your employees' wages. You're also required to pay a matching amount of Social Security and Medicare taxes for your employees, and to pay state and federal unemployment tax.
In this article, we cover the basics on payroll and other tax obligations for employers.
Social Security and Medicare taxes are also known as "FICA" taxes, for the Federal Insurance Contributions Act. Employers have to withhold FICA taxes from their employees' wages. They also have to pay a separate, matching amount of FICA taxes for their employees.
The Social Security tax rate can change from year to year. So can the Social Security "wage base," which is the earnings cap for tax purposes.
Social Security tax rate. As of November 2022, the Social Security tax rate is 6.2%. You're required to withhold 6.2% of an employee's wages for Social Security taxes and to pay a matching amount in Social Security taxes until the employee reaches the wage base for the year.
Wage base for Social Security tax. The wage base for Social Security tax is $147,000 for 2022 and $160,200 for 2023. Once an employee earns that amount, neither the employee nor the employer owes any further Social Security tax.
The tax rate for Medicare taxes changes, too. But Medicare taxes differ from Social Security taxes in that they don't have a wage base and do carry a surtax.
Medicare tax rate. The Medicare tax rate is 2.9% for the employee and the employer combined as of November 2022. You withhold 1.45% of an employee's wages and pay a matching amount for Medicare tax.
No wage base for Medicare tax. There's no wage base for the Medicare portion of the FICA tax. Both the employer and the employee continue to pay Medicare tax, no matter how much the employee earns.
Medicare surtax on higher earnings. Employees who earn more than $200,000 if single, $250,000 if married and filing jointly, or $125,000 if married and filing separately, must pay an additional 0.9% Medicare tax on earnings over the applicable limit. The employer must withhold this amount but doesn't have to pay any part of it.
Self-employed individuals pay a self-employment tax that includes both the employer and employee portions of Social Security and Medicare taxes. The self-employment tax is based not on wages, but rather on the net earnings of the business.
The Social Security tax rate for the self-employment tax is 12.4% as of November 2022 and is applied up to the same limits as the Social Security wage base described above. The Medicare tax rate for the self-employment tax is 2.9%, with the same 0.9% surtax on higher earnings.
Employers also must pay federal unemployment tax (FUTA) and state unemployment tax (SUTA).
The FUTA rate is 6.2 % as of November 2022, but you can take a credit of up to 5.4% for SUTA taxes that you pay. If you're eligible for the maximum credit, your FUTA rate will be 0.8%.
The wage base for FUTA is $7,000. You'll stop paying FUTA for each employee once the employee's wages exceed $7,000 for the year.
Check with your state about SUTA tax rates and the wage base. Generally, your SUTA tax rate is based on the amount of unemployment claims that terminated employees filed. When your business is new, your SUTA tax rate starts at the maximum and declines if you build a history of few claims.
You're required to withhold federal and state income taxes from employees' paychecks and to pay those withholdings over to the IRS and state revenue agencies. These withholdings aren't payroll taxes—they are simply a mechanism for income tax collection.
For information on federal payroll tax requirements, check out IRS Publication 15, Circular E, Employer's Tax Guide. For information on state payroll tax requirements, look up your state's taxation and revenue department.