Employer Payroll Taxes

What Are Employer Payroll Taxes?

Employer payroll taxes are taxes withheld from an employee’s paycheck that companies are responsible for paying to the government. Payroll taxes are a group of taxes used to fund Medicare, Social Security benefits, federal unemployment, state unemployment (where applicable), and more.

What’s the Difference Between Income Tax and Payroll Tax?

Payroll taxes are federal taxes applied to an employee’s paycheck. They are paid to the government and are used to cover the cost of things like Medicare. Payroll tax also only applies to wages and salaries.

Income tax is usually paid on all sources of income. It’s the largest single source of federal revenues, whereas payroll taxes are the second-largest.

4 Types of Payroll Taxes Paid by Employers

Social Security Tax

Employers and employees are both responsible for paying Social Security taxes. Employers are expected to pay 6.2% of each employee’s wages for Social Security, and employees must match that same 6.2%. Self-employed professionals pay 12.4%, to cover both the employee and employer portions.

Medicare Tax

The employer and employee also share Medicare tax responsibilities. Each party is responsible for contributing 1.45% of an employee’s wages, for a total of 2.9%. If you’re self-employed, you’re responsible for both portions, so the tax rate is 2.9%.

An additional Medicare tax from the Affordable Care Act (ACA) may apply if the employee reaches a certain income threshold. The rate for this additional levy is 0.9%.

Federal Unemployment Tax

The Federal Unemployment Tax Act (FUTA) requires employers to pay unemployment taxes. This tax funds unemployment programs that financially assist individuals who are out of work. Employers pay 6% of the first $7,000 paid annually to each employee. Certain state rules and credits may apply.

State Unemployment Tax

The State Unemployment Tax Act (SUTA) requires employers to contribute to state unemployment benefits. This is typically an employer-only payroll deduction, but some states require employees to contribute. We recommend reviewing your state’s Department of Labor guidelines to find the most current rates and regulations.

How Do I Calculate Employer Payroll Taxes?

An organization’s payroll specialist is responsible for withholding, reporting, and paying employer taxes to the Internal Revenue Service (IRS) for every employee. Here’s how to calculate employer payroll taxes:

Step 1: Calculate Gross Taxable Wages

Take an employee’s gross wages and subtract any non-taxable income or pre-tax deductions. This may include a health savings account (HSA) or 401(k) plan contributions.

Step 2: Calculate Employer Tax Levies

Once you’ve identified your employee’s gross taxable wages, you can start calculating your taxes. This includes:

• FICA taxes (Social Security at 6.2% and Medicare at 1.45%)
• Unemployment taxes (FUTA at 6% on the first $7,000 and SUTA, if applicable).

Keep in Mind:  Federal and state payroll tax rates for the current tax year are subject to change. For the most current information, visit the IRS and Department of Labor websites or consult a tax professional.

What Is FICA?

The Federal Insurance Contributions Act (FICA) is a US law mandating the tax levies that fund Medicare and Social Security programs. This is not a separate tax—FICA simply labels the combination of Medicare taxes and Social Security taxes deducted from each paycheck.

Payroll Taxes Example

Mustafa earned a gross income of $3,500 during his first payroll period in January. To calculate the amount of employment tax reported and paid, you need to subtract unemployment and FICA taxes from his gross taxable wage:

1. First, his pre-tax $350 health insurance deduction is subtracted from his gross income to get $3,150.
2. Next, the employer portion of the payroll taxes is calculated based on Mustafa’s gross taxable wage ($3,150):

• Social Security tax = $195.30
• Medicare tax = $45.68
• Federal unemployment tax (let’s assume the full 6%) = $189
• State unemployment tax (assuming 1.16%) = $36.54

1. In this instance, the total employer taxes reported and paid is $466.52.

The above example excludes employee taxes, so keep in mind that employers generally must deposit employee FICA contributions, too.

When Should Payroll Taxes Be Paid?

Reporting and paying employer payroll taxes are essential steps in the payroll process and must be done according to a set schedule. Here’s a quick, general breakdown of the IRS reporting and deposit due dates:

Payroll Tax Reporting

Depending on your business, you’ll use specific forms to report payroll taxes, such as:

• Form 941 (Employer’s Quarterly Federal Tax Return)
• Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees)
• Form 944 (Employer’s Annual Federal Tax Return)
• Form 945 (Annual Return of Withheld Federal Income Tax)
• Form 940 (Employer’s Annual Federal Unemployment Tax Return).

Deposit Due Dates for Payroll Taxes

According to the IRS Employer’s Tax Guide, businesses must follow one of two deposit schedules for Social Security, Medicare, and federal income taxes: monthly or semi-weekly.

Here’s a breakdown of the deposit due dates for employer payroll taxes, depending on the required deposit schedule:

• Monthly deposits:  These are due by the 15th day of the following month.
• Semi-weekly deposits:  For payments made Wednesday through Friday, deposits are due by the following Wednesday. For payments made Saturday through Tuesday, deposits are due by the following Friday.

Some employers are on a quarterly schedule and taxes should be deposited by January 31, April 30, July 31, and October 31. The deposit schedule you’ll use depends on your tax liability (not how often your employees are paid).

FUTA and state taxes run on a separate schedule. FUTA deposits are due on the last day of the first month after the preceding quarter. For state payroll tax due dates, visit your state’s Department of Labor website.

Deposits must be made on business days. If your deposit date lands on a legal holiday (a federal holiday such as Thanksgiving or Independence Day) then it must be sent on the next business day. The IRS guide notes that the term legal holiday applies to any legal holiday in the District of Columbia.

All federal taxes must be deposited electronically.

Why Do Employers Have to Match Payroll Taxes?

Employers must match payroll taxes because it’s a government requirement under US law. FICA contributions help fund Social Security and Medicare programs that are critical to the wellbeing of several beneficiaries, including:

• Retirees
• Children
• People with disabilities.

What Happens if an Employer Doesn’t Deduct Payroll Tax?

The penalties for failure to pay FICA and other payroll taxes range from assertive IRS collection attempts and hefty penalty fines to criminal charges. Employers have a legal responsibility to collect and pay these taxes to the IRS. Not collecting, accounting for, or depositing these taxes is considered stealing from employees and the United States Treasury.