What Are Payroll Taxes?

Most employers are required to withhold and pay income taxes on behalf of their employees.

By , J.D.

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Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and pay on behalf of your employees. You're required to withhold state and federal income taxes, as well as Social Security and Medicare 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.

Have Your Employees Fill Out a W-4

Have each new employee complete IRS form W-4. You'll use this form to calculate the amount of federal income tax to withhold from the employee's wages. Most states have income tax structures based on the federal system, so you'll use the W-4 to calculate the amount of state income tax to withhold too.

FICA Taxes

Social Security and Medicare taxes, also known as "FICA" taxes, must be withheld from your employees' wages. As an employer, you must also pay a matching amount of FICA taxes for your employees.

Social Security Tax Rate

Currently 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. The wage base for Social Security tax is $147,000 for 2022. Once that amount is earned, neither the employee or the employer owes any Social Security tax.

Medicare Tax Rate

The Medicare tax rate is 2.9% for the employee and the employer. You'll withhold 1.45% of an employee's wages and pay a matching amount for Medicare tax. There is 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 is earned. Employees who earn more than $200,000 if single or $250,000 if married, 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.

State and Federal Unemployment Taxes

The employer also must pay State and Federal Unemployment Taxes (SUTA and FUTA).

The FUTA rate is 6.2 %, 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 will stop paying FUTA for each employee once the employee's wages exceed $7,000 for the year.

You'll need to 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.

Getting More Information

For information on Federal payroll tax requirements, check out IRS Publication 15, Circular E. For information on State payroll tax requirements, contact your state's taxation and revenue department.

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