What are Payroll Taxes?

Learn about how to calculate payroll taxes, when they're due, and what they're for. Includes guides to calculating Federal Income Tax, FICA, FUTA and more.

Updated on November 8th, 2019

The SMB Guide is reader-supported. When you buy through links on our site, we may earn an affiliate commission. Learn more

Payroll taxes are made up of deductions from employee wages and contributions paid by the employer based on employee wages. These taxes are collected on a federal, state, and local level by the relevant tax authorities.

Different Payroll Taxes:

Tax

Type

Description

Federal Income Tax

Withholding

A portion withheld from employee paychecks. The rate is determined by the IRS.

Federal Insurance Contribution Act (FICA)

Shared

Contributions made by both employee and employer towards Social Security and Medicare. Rates are reviewed every year.

Federal Unemployment Tax (FUTA)

Employer

Employer's contribution to the Federal Unemployment Program.

State Income Tax

Withholding

Income tax required by most states.

State Unemployment Tax (SUTA)

Employer

State-level unemployment tax that is connected to FUTA. Rates determined by state tax authority.

Self-employment Tax

Self-employed individual

Social security and Medicare contributions based on the net income of the self-employed individual.

How to Calculate Payroll Taxes:

As the employer, it is your responsibility to withhold income tax and pay it to the government on behalf of your employees. The responsibility to calculate and withhold the correct amount from each paycheck falls on your shoulders.

You can outsource. There are companies that offer payroll tax services. We suggest OnPay, and Wagepoint.

You can use payroll software. Payroll software simplifies the task of calculating and distributing employee pay and calculating taxes. We suggest Gusto, AccountEdge Pro, BambooHR, and SurePayroll Inc..

Federal Income Tax:

This is the portion withheld from an employee's paychecks. The rate is determined by the IRS and is reviewed every year. The amount withheld from each employee depends on which tax bracket they fall under.

To do this calculation you will need:

  • A copy of each employee's Form W-4, including additional allowances found in Line 5 of the form.
  • The latest withholding tax rates information in IRS Publication 15-A.
  • Gross income figures.
  • Payroll period: how often the employee is paid.

Calculating Federal Income Tax:

  1. Check your employee's Form W-4 for their marital status, gross income, and number of allowances.

  2. Open the IRS Publication 15-A.

  3. Find the table that corresponds to your company's payroll period (weekly, bi-weekly, monthly, bi-monthly).

  4. Find the column that corresponds with the employee's marital status.

  5. Find the number of allowances in the left-hand column that matches the number of allowances in the employee's Form W-4.

  6. Move across to columns A and B to find the employee's gross income, which will fall between the numbers in A and B.

  7. Now subtract the amount given in column C from the employee's gross income.

  8. Multiply the result by the percentage in column D.

Example:

Your employee earns $8,550 a month. She is single and has three additional allowances on her Form W-4.

Formula:

(Gross income - column C) * column D

(8,550 - 3,389.42) * 0.24 = 1,234.53.

Therefore, you must withhold $1,234.53 from this employee's paycheck every month for Federal Income Tax.

Calculating FICA:

FICA taxes are paid by both employee and employer, and they include Social Security and Medicare tax.

One half of the tax is deducted from the employee's paychecks, and the other half is matched by the employer from the company's revenue.

To do this calculation you will need:

  • Gross income figures.
  • Latest Social Security tax rate: 6.2%.
  • Latest Medicare rate: 1.45%.

FICA Formula:

Gross income * the tax rate = withholdings.

Social Security.

Gross income * 6.2% = withholdings.

Example:

Your employee's gross income is $8,550 a month.

8,550 * 0.062 = 530.10

You must withhold $530.10 from their paycheck for Social Security every month. The company contributes the same amount.

Medicare.

Gross income * 1.45% = withholdings.

Example:

Your employee's gross income is $8,550 a month.

8,550 * 0.0145 = 123.98

You must withhold $123.98 from their paycheck for Medicare every month. The company contributes the same amount.

Calculating FUTA:

Federal Unemployment Tax (FUTA) is an employer tax paid quarterly on the first $7,000 of every employee's paycheck.

While the FUTA rate is 6% of the first $7,000 for every employee, it can be reduced to as little as 0.6%. If you pay your State Unemployment Taxes (SUTA) on time every quarter you will receive a 5.4% tax credit.

Employers must file Form 940 by January every year for the previous year to report FUTA tax payments made.

To do this calculation you will need:

  • The number of employees earning more than $7,000.
  • Futa tax rate: 6%.

FUTA Formula:

  1. The portion of income taxed for FUTA * 6% = tax paid per employee.

  2. Tax paid per employee * the number of employees earning more than $7,000 = total FUTA to be paid.

Example:

You have 12 employees who have all earned at least $7,000 in the year. FUTA is only based on the first $7,000.

  1. 7,000 * 0.06 = 420
  2. 420 * 12 = 5,040

Therefore, your business must pay $5,040 federal unemployment tax for all 12 employees. With the tax credit, it will be a total of $504.

Calculating State Income Tax:

States take one of three approaches to State Income Tax:

  • They collect a flat rate.
  • They tax progressively according to tax brackets.
  • They don't tax income at all.

State Income Tax Approaches:

Tax Approach

Rate

States

Flat rate

2% - 5%

Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, Tennessee, Utah.

No income tax

0%

Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming.

Progressive tax

10% - 37%

Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, Wisconsin.

To calculate state income tax you will need:

  • Employee gross income.
  • The income tax rate for the state.

State Income Tax Formula:

Gross income * tax rate

Examples:

Your company is in Kentucky, where there is a 5% flat rate. And your employee earns $8,550 a month.

8,550 * 0.05 = 427.50

You must withhold $427.50 for Kentucky state income tax from the employee's paychecks every month.

Your company is in Hawaii, where the lowest tax bracket starts at $2,400 and the highest at $200,000. Your employee earns $2,550 a month, falling into the lowest tax bracket, and so they are taxed at a rate of 1.4%.

2,550 * 0.014 = 35.70.

You must withhold $35.70 from this employee's paychecks for Hawaii state income tax.

Calculating SUTA:

State Unemployment Tax is a tax paid by the employer on a tax base per employee and at a rate determined by the state in which the business is situated.

SUTA Formula:

The tax base for each employee * rate

Example:

The tax rate set by a state is 5.4% on a tax base of $17,000 per employee.

17,000 * 0.054 = 918

Therefore, the employer pays $918 to SUTA for each employee.

Calculating Self-employment Tax:

Self-employment tax is how self-employed individuals make contributions to Social Security and Medicare. They pay both the employee's share of FICA and the employer's share. This tax applies to self-employed people who have net earnings of more than $400.

To do this calculation you will need:

  • IRS Form 1040.
  • Self-employment Tax Rate: 15.3% on the first $132,900 of net income. Add a further 2.9% of the net income over $132,900.
  • Net income (including all tips).

Self-employment Tax Formula:

Net income * 15.3%

Example.

You earned a net income of $128,000.

128,000 * 0.153% = 19,584.

You must, therefore, remit $19,584 to the IRS for the year's earnings.

FAQs:

What payroll taxes are employers required to pay?

Employers are required to pay FICA tax, Federal Unemployment Tax, State Income Tax, and State Unemployment Tax.

How do you figure out payroll taxes?

  1. To calculate Federal Income Tax, use the information on your employee's Form W-4 to find the correct table in the IRS Publication 15-A tables, and then follow the formula in the table.

  2. To calculate FICA, multiply the employee's gross income by 6.2% for Social Security and by 1.45% for Medicare, then match the total contribution.

  3. To calculate FUTA, multiply the employee's first $7,000 earned in the year by 6%.

  4. To calculate State Income Tax, multiply the employee's gross income by the state-set tax rate. Not all states have a state income tax.

  5. To calculate state unemployment tax (SUTA), multiply the state-set tax base by the state-set tax rate.

What are the payroll taxes for 2018?

  • The social security tax for 2019 is 6.2% for the employee and 6.2% for the employer.
  • Medicare is 1.45% for the employee and 1.45% for the employee.
  • Federal Unemployment Tax is set at 6% of the first $7,000 earned by an employee.

Where do payroll taxes go?

Payroll taxes are collected to support a number of government programs such as Medicare, Social Security, and unemployment.

Do employees pay payroll taxes?

Employees pay income tax and a portion of FICA tax, both of which are withheld from employee paychecks by employers.

What is included in payroll tax?

  • Federal income tax.
  • FICA (Social Security and Medicare).
  • Federal Unemployment Tax (FUTA).
  • State income tax.
  • State Unemployment Tax (SUTA).

How does payroll tax work?

Employers withhold a percentage of employee wages for income tax and FICA, while also contributing to FICA and paying employer taxes such as Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA).

How do I set up payroll taxes?

  1. Make sure all new employees complete IRS Form W-4.
  2. Choose a payroll schedule.
  3. Calculate and withhold taxes.
  4. Report taxes to the IRS.

Are employers required to withhold local taxes?

If the city or municipality requires payroll taxes to be withheld from employee wages, then yes.

How do I calculate my self-employment tax?

For calculating self-employment tax, multiply the first $132,900 of your net income by 15.3%. Add 2.9% of the net income over $132,900.

What is the FUTA tax rate for 2019?

The FUTA tax rate for 2019 is 6% on the first $7,000 earned by an employee in the year.

What is payroll tax vs. income tax?

Payroll tax isn't a single tax. It is a group of taxes that includes income tax.

What are the two federal payroll taxes?

The two federal payroll taxes are the Federal Insurance Contribution Act (FICA) tax and the Federal Unemployment Tax Act (FUTA) tax.

What is an example of payroll tax?

The Federal Insurance Contribution Act (FICA) tax and the Federal Unemployment Tax Act (FUTA) tax are two examples of payroll taxes.

Are payroll taxes progressive?

Federal income tax and state income tax are both progressive. The portion deducted from an employee's paycheck for these taxes varies depending on the tax bracket in which the employee falls.

Is redundancy included in payroll tax?

Severance pay is seen by the IRS as wages and so is taxed as any wages would be.

Are director's fees included in payroll tax?

Director's fees are not subject to Social Security, Medicare, and income tax withholding, but are seen by the IRS as self-employment income and so are subject to self-employment tax.

When should payroll taxes be paid?

Depending on the size of your payroll, FICA and income tax payments must be paid to the IRS either monthly or semi-weekly.

How do I report payroll taxes?

  • To report income taxes, social security tax, and Medicare taxes withheld from employees' paychecks, submit IRS Form 941 every quarter.
  • To report Federal Unemployment Tax (FUTA), submit IRS Form 940 annually.
  • Form W-2 must be filed before the end of January every year to report employee wages and taxes.

Do I have to pay payroll tax?

If your business employs people, then yes you must pay payroll tax.

Are allowances included in payroll tax?

When doing an employee's Federal Income Tax, the number of allowances on the employee's Form W-4 will determine how much of their income should be withheld and remitted to the IRS.

What are payroll tax exemptions?

Employees can claim Withholding Allowances which exempt them from paying some taxes or full taxes.

Is Workers' Compensation payroll tax?

No. Workers' Compensation is insurance all businesses must have to cover their employees in case of injury.

How much does an employer pay for FICA?

An employer matches the 7.65% of gross income each of their employees pays towards Social Security and Medicare.