What Are Payroll Taxes? A Guide to State and Federal Tax Withholding

As of 2023, an estimated 22 million Americans work from home, many of whom enjoy the freedom that comes with being untethered to a commutable work location. What does that mean for the future of payroll?

It's pretty simple if your workforce resides in the same state as your company, but that's not always the case. Many businesses employ workers in neighboring states and beyond, reaching far and wide for the talent they need to thrive as an organization.

Payroll is already a pretty dense subject. And when you combine payroll with taxes, the jungle of acronyms, rates, forms, and questions to sort through can be downright confusing.

Hiring a certified payroll specialist and using payroll software like BambooHR® can help simplify a lot of these questions for your organization. But if you don’t have those resources, or if you just want to know a little more about how to do payroll yourself, this guide will help you navigate payroll taxes like a pro.

What Are Payroll Taxes?

Payroll taxes are deductions withheld from an employee’s paycheck and paid to the government to fund several programs like Social Security and Medicare. Applied to wages, tips, and other forms of compensation, they appear as an itemized list on an employee’s pay stub each pay period and on their Form W-2, Wage and Tax Statement, at the end of each year.

Payroll providers typically use different codes for each tax deduction, making it easy for employees to read their wage statements. These vary by provider, but you may have seen any of the following abbreviations for payroll taxes:

• OASDI or SS: Social Security tax
• MEDI or MedFICA: Medicare tax
• FWT: Federal income tax
• SWT: State income tax

Payroll Taxes vs. Employment Taxes

Sometimes, the terms "payroll taxes" and "employment taxes" are used to describe specific types of deductions. In this article, we'll generally refer to all the taxes employers are responsible for handling while running payroll as "payroll taxes."

4 Types of Payroll Taxes Every Employer Should Know

Payroll taxes are governed by federal, state, and local laws and are calculated at specific rates. Your organization is responsible for deducting these taxes, even if it doesn't share in the payment responsibility. Here's a breakdown of each payroll tax type and what it's for:

1. FICA (Social Security and Medicare Taxes)

Social Security and Medicare taxes fall under the Federal Insurance Contributions Act, or FICA. The money collected from FICA payroll taxes goes straight to the federal government to help fund benefit programs for retirees, survivors of deceased workers, people with disabilities, and other qualified individuals.

Employers and employees share this responsibility, each paying a total of 7.65%. The Social Security tax applies to wages up to the current limit ($168,600 for 2024), and the Medicare tax applies no matter how much the employee earns.

2. Unemployment Insurance (UI) Taxes

Your organization’s payroll taxes also fund the Federal-State Unemployment Insurance Program, which supports eligible workers and their families after losing a job. The tax rates for UI programs include:

• Federal Unemployment Tax Act (FUTA): Employers pay FUTA taxes, which apply to the first $7,000 your organization pays to an employee during the calendar year. Employers typically receive a FUTA tax credit, resulting in a lower net payment than the standard percentage.
• State Unemployment Tax Act (SUTA): SUTA taxes go toward each state's unemployment fund. Most states only require employers to pay SUTA taxes, but employees in a handful of states must also pay into the program.

3. Income Tax Withholding

Income tax comes directly out of your employees' paychecks, but you're responsible for withholding and remitting it on their behalf. The specific amount depends on the employee. To figure out how much federal income tax to withhold, you'll use their W-4 form.

Federal income tax is wage dependent, which means you owe more as you earn more. State income tax varies—some states have no income tax and some have a flat tax, but the majority enforce a graduated tax rate.

4. State and Local Payroll Taxes

Some states require additional tax deductions. Take New York State, for example. NY employers withhold payroll taxes for state disability insurance and paid family leave programs, along with some local tax rules that only apply to employees in New York City and Yonkers.

How to Calculate Payroll Taxes

Before running payroll, be sure you know exactly how to calculate payroll taxes for your organization. You'll withhold some of these funds from employees’ paychecks and pay others as an employer. Here are the federal taxes you should factor in per employee:

2024 Federal Payroll Tax Rates

State and local payroll tax rates (UI, disability, etc.) and payer responsibilities are location-dependent. Fortunately, you don’t have to memorize all these rates yourself. There are numerous payroll tax calculators online, and the best payroll software providers can help you sort through all the rules and regulations, as well.

How to Withhold Payroll Taxes for Remote Employees

As an employer, you're responsible for handling all the required payroll taxes for your workforce accurately—including tax withholdings for remote employees. Federal payroll taxes are pretty straightforward because they apply no matter where your employees live in the US. But in most cases, remote employees across state lines are subject to the tax laws of their state.

Be prepared to comply with the tax regulations in your company's location and the location of your remote workers. If your workforce spans multiple states, having a payroll expert can help ensure your payroll process is compliant with each jurisdiction.

Do I Withhold Payroll Taxes for Independent Contractors?

The short answer is, no. Freelancers and other self-employed individuals aren't classified as employees, so they're responsible for paying the self-employment tax (SE tax) and others on their own. If your company partnered with independent contractors and paid them $600 or more, you'll report the payments made to those individuals on Form 1099-NEC.

When Are Payroll Taxes Due?

Social Security, Medicare, and federal income payroll taxes typically run on a monthly schedule or a semi-weekly schedule (with one exception, of course). This means your tax deposit due dates could be any of the following:

• Monthly deposits are due by the 15th day of the following month.
• Semi-weekly deposits fall either on a Wednesday or a Friday, depending on your payday.
• Next-day tax deposits are required by the next business day, regardless of your regular tax deposit schedule, if you accumulate $100,000 or more in taxes.

Before the tax year begins, figure out which schedule to use. According to the IRS, your payroll tax deposit schedule depends on the total tax liability you reported on Form 941, Form 943, Form 944, or Form 945, and your lookback period (a specific four-quarter period from the previous year).

Tip for new business owners: If you’re a brand new employer, you probably don't have a lookback period (meaning you didn’t pay payroll taxes during that time frame). In this case, you'll start out on a monthly deposit schedule.

FUTA Tax Due Dates

On the other hand, FUTA taxes are typically deposited quarterly, but they're determined by your tax liability. If the total amount owed is over $500, it's due by the last day of the first month that follows the end of each quarter, or:

• 2024 Q1 due date: April 30, 2024
• 2024 Q2 due date: July 31, 2024
• 2024 Q3 due date: October 31, 2024
• 2024 Q4 due date: January 31, 2025

But as a startup or small business owner, this might not be the case. If you owe $500 or less, your organization may not have to pay until the next quarter. Simply carry that amount over, add it to the liability for the next quarter, and pay the entire sum by the next due date (as long as it reaches the minimum).

State Tax Due Dates

Just like their respective tax rates, state tax filing deadlines vary. Many states run quarterly tax deadlines, but your state labor website will have the most current information.

If your organization deposits its payroll taxes late or inaccurately, you will likely face a failure to deposit penalty and other costly repercussions. Using payroll software and a certified payroll specialist is the best way to ensure your organization avoids common payroll mistakes, so you can move forward headache-free.

How to File Payroll Taxes

You can report and deposit your state payroll taxes according to your state's schedule and rules. However, all federal tax deposits must be made via electronic funds transfer (EFT) through the Electronic Federal Tax Payment System® (EFTPS®). This is a free service from the US Department of the Treasury. You can send electronic tax deposits yourself or your payroll software provider can do it on your behalf.

Here’s a general overview of how to file federal payroll taxes:

• Step 1: Figure out your tax deposit schedule and due dates.
• Step 2: Calculate how much should be withheld from each employee's paycheck.
• Step 3: Calculate how much tax you owe as an employer.
• Step 4: Sign into the EFTPS® platform.
• Step 5: Follow the instructions to make your payment.

For more information about when and how to pay payroll taxes, see IRS Publication 15, (Circular E), Employer's Tax Guide.

Payroll comes with a lot of information to keep tabs on, which is why it’s always a good idea to have backup. A certified payroll specialist and a reliable payroll software provider can help you make sense of the deadlines and tax rates that apply to your organization, so you can do payroll the right way every time.