payroll tax

Payroll Tax 101 — How to Calculate Payroll

payroll tax

Everyone in the United States who receives a paycheck, irrespective of what their job may be, is required by federal law to contribute to payroll taxes.

Certain amounts of these taxes are the responsibility of the employee, and others are paid by the employer.

In this post, we’ll delve into what payroll taxes are, what the rates are for 2019, changes for 2020, how to calculate payroll taxes, where the money goes, and who pays what.

Payroll Tax Defined

Simply put, payroll taxes are an amount of money that is paid to the Internal Revenue Service (IRS) – and to states and local entities that collect income tax – the wages of employees.

The taxes are deducted from employee paychecks and are used to finance two government-run programs: Social Security and Medicare. These social insurance taxes make up 24.

2% of combined federal, state, and local government revenue, and they’re the second largest source of government revenue in the United States. Federal income tax takes first place.

What Falls Under the Payroll Tax Umbrella?

All told, as an employer, you are responsible for the following taxes with regard to employee pay:

  • Withholding federal income taxes
  • Withholding FICA taxes, as well as submitting the additional half that your business is responsible for
  • Withholding state and local income taxes where applicable
  • Paying federal and state unemployment taxes
  • Paying workers’ compensation taxes to state and federal agencies

Federal Income Tax

This tax is calculated the most recent Form W-4 an employee has filled out. The IRS publishes annual tables to help you determine the amount of tax to be withheld from each employee’s paycheck. The percentage is dependent on the employee’s gross wages, filing status, and the number of exemptions listed on the W-4.

State and Local Income Tax

These taxes vary wildly depending on the state. Seven states do not tax individual income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee impose income taxes solely on dividends and interest and not earned wages.

FICA Taxes

These next two federal payroll taxes are also known as “FICA«, which stands for “Federal Insurance Contributions Act.” You’ll see them printed as “FICA – Medicare” and “FICA – Social Security” (or some variation thereof) on employee pay stubs.

  1. Medicare is a 2.9% pay roll tax that is split equally between employer and employee. Employees and employers will each pay 1.45% Medicare tax on the first $200,000 of the employee’s wages. The Affordable Care Act (ACA) added a provision wherein highly compensated employee must pay an additional 0.9% Medicare tax. The threshold annual compensation amounts that trigger the additional tax are:
    • $250,000 for married taxpayers who file jointly
    • $125,000 for married taxpayers who file separately
    • $200,000 for single and all other taxpayers
  2. Social Security is a 12.4% payroll tax. For 2020, the Social Security tax will be paid on the first $137,700 of wages, a $4,800 increase from last year. Half of these payroll taxes (7.65%) are directly remitted to the IRS by employers, while the other half is taken workers’ paychecks.

Federal Unemployment Tax

This 6% tax is solely paid by the employer. Employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. This credit is lower in “Credit Reduction States” where the state has not repaid money it borrowed from the federal government to pay unemployment benefits.

State Unemployment Tax

Each state administers its own unemployment insurance program within guidelines established by federal law. Three states – Arkansas, New Jersey and Pennsylvania – require minimal employee contributions in certain situations.

Where the Tax Dollars Go

Employer Employee Total Income Cap What They Pay For 
Social Security 6.2% 6.2% 12.4% $137,700 85 cents of every dollar goes into an account that pays benefits to retirees and surviving spouses and children of employees who have died. The other 15 cents is put into an account that pays benefits to people with disabilities. 
Medicare 1.45% 1.45% 2.9% No Limit* Goes into an account that pays for some healthcare costs for Medicare recipients. 
State Unemployment Variable NoneVariableVariablePaid to participating state workforce agencies to pay unemployment benefits. State laws determine these tax rates.
Federal Unemployment 6.0%None6.0%$7,000Covers the cost of managing the Unemployment Insurance and Job Service programs in every state.

*Wages of more than $200,000 earned in 2019 will be taxed an additional 0.9%

How to Calculate Employer Payroll Taxes

FICA and Unemployment taxes are relatively standard and, therefore, easier to calculate. Federal and state income taxes, however, can be a bit more of a challenge.

Form W-4 determines the amount of Federal income tax that is withheld from a paycheck. This form shows employees’ filing statuses and number of exemptions they claim.

IRS Publication 15B, Employer's Tax Guide, in Section 17: How to Use the Income Tax Withholding Table, indicates how much tax to withhold from each employee.

This tax table is updated annually by the IRS, so it’s important to keep on top of things.

A similar tax table is produced annually by each state. As an example: if your employees work in Georgia, you can download the 2019 Georgia Income Tax Tables to determine precisely how much state income tax to withhold from your employees’ paychecks.

Payroll Tax Penalties

There’s no way around it: Your company is required by law to submit payroll taxes to the government. If taxes are paid late, incorrectly paid, or just not paid at all, your business can be faced with harsh penalties and accrue thousands of dollars in interest on unpaid taxes.

The percentage rate charged for a penalty depends on how late your payroll tax deposit is received. For late amounts or deposits that aren’t properly prepared, the penalty rates are:

  • 2% for deposits 1–5 days late
  • 5% for deposits 6–15 days late
  • 10% for deposits greater than 15 days late.
  • 10% for deposits required to be paid by Electronic Funds Transfer (EFT) that are not.
  • 15% (a 5% addition to the 10% for late payment) for all amounts that remain unpaid more than 10 days after the date of the first notice, or the day on which the taxpayer received a demand for immediate payment, whichever is earlier.

Overseeing the payment of payroll taxes can be extremely overwhelming. If you’re a small business owner with only a handful of employees, the process can be manageable. But, it can also be fraught with uncertainty.

A single mistake in calculations could end up costing you thousands. If you work for a larger company with many employees, managing payroll on your own with spreadsheets or disparate systems, is simply untenable.

The good news is, by hiring a payroll provider, you won’t have to worry about submission guidelines, accuracy of payment, or getting your payroll taxes paid on time. We will take care of it for you, saving you the hassle and anxiety every time payroll rolls around.

Looking for a hassle-free way to manage payroll and tax compliance? Paycor got its’ start in the Midwest, learning to manage the complexities of the nation’s most challenging regulatory environment.

For nearly 30 years, we’ve lead in the way in keeping SMB clients compliant, and it all starts with our Payroll product.

Click here to learn more about our payroll and tax expertise, or contact one of our expert solutions consultants so we can learn more about your business.

NOTE: This information is meant to be a general article about how payroll taxes largely work. This article is not intended to serve as tax or legal guidance for your business. For advice specific to your company, consult a tax professional.


Payroll Calculator Tax Rates

payroll tax

If it’s time to pay your employees, you’re in the right place! Our free payroll tax calculator makes it simple to handle withholdings and deductions in any state. Employers can use it to calculate net pay, figure out how much to withhold, and know how much to include in employees’ paychecks.

Below our calculator, you’ll also find federal tax rates, state tax rates, and links to other employer tax calculators that you can use to check your work.

Calculate payroll for an employee:

OnPay pays employees and handles all the taxes for you.

Have any questions about how to use this payroll calculator? We’ll go over the basics right here, but you can use our payroll processing guide to find definitions, tax forms, and detailed instructions for calculating payroll on your own.

To run payroll, you need to do seven things:

  1. Get your business set up to run payroll

  2. Figure out how much each employee earned

  3. Calculate taxes you’ll need to withhold and additional taxes you’ll owe

  4. Pay your employees by subtracting taxes (and any other deductions) from employees’ earned income

  5. Remit taxes to state and federal authorities

  6. File quarterly and year-end payroll tax forms

  7. Give your employees and contractors W-2 and 1099 forms so they can do their taxes

The calculator above can help you with steps three and four, but it’s also a good idea to either double-check the calculator by using the payroll tax rates below, or save time and effort by using a reliable payroll service.

Federal Payroll Tax Rates

The steps our calculator uses to figure out each employee’s paycheck are pretty simple, but there are a lot of them. Here’s how it works, and what tax rates you’ll need to apply.

  1. Figure out each employee’s gross wages. Gross wages are the total amount of money your employee earned during the current pay period. The math works a little differently for salaried employees, hourly employees and contractors.

    1. Hourly employees: You’ll need to multiply the number of hours your employee worked by their hourly pay rate. If they worked any overtime hours, make sure to calculate those hours at the overtime rate.
    2. Salaried employees: A salaried employee is only paid a fraction of their annual salary each paycheck, so divide that employee’s annual salary by the number of pay periods you’ll have each year.
    3. Contractors: Advance to “Go” and collect $200! You actually don’t have to withhold any payroll taxes for contractors. Just pay them whatever’s on their invoice, but remember that you’ll need to send each contractor a 1099 form at the end of the year. Keeping good payroll records will make that process a lot easier.
  2. Deduct any pre-tax withholdings. Payroll taxes aren’t the only thing to exclude from employees’ paychecks. Make sure to deduct for things health and retirement benefits.

    The process for documenting and remitting these funds will vary depending on your benefits providers.

    Note that many services can be integrated with payroll software, which allows you to automate your deductions.

  3. Deduct and match any FICA taxes: FICA, the Federal Insurance Contributions Act, is one of the many payroll acronyms you’ll soon get to know and love. It simply refers to the Medicare and Social Security taxes employees and employers have to pay:

    1. Social Security tax: Withhold 6.2% of each employee’s taxable wages until they earn gross pay of $137,700 in a given calendar year. The maximum an employee will pay in 2020 is $8,537.40. As the employer, you must also match your employees’ contributions.
    2. Medicare tax: Under FICA, you also need to withhold 1.45% of each employee’s taxable wages for Medicare. Employers must match this tax as well. There’s no withholding limit the one for Social Security, but well-compensated employees who earn more than $200,000 must pay an Additional Medicare Tax of 0.9%. You don’t have to match the 0.9%, but you should include it in your withholding calculations.
  4. Pay FUTA unemployment taxes: Employers are solely responsible for paying federal unemployment taxes. The tax rate is 6% of the first $7,000 of taxable income an employee earns annually. If your company is required to pay into a state unemployment fund, you may be eligible for a tax credit.
  5. Deduct federal income taxes, which can range from 0% to 37%. Withholding information can be found through the IRS Publication 15-T.
  6. Subtract any post-tax deductions: Some employees may be responsible for court-ordered wage garnishments or child support. They may also choose to make post-tax contributions to savings accounts, elective benefits ( life insurance), or other withholdings.

State-by-State Tax Rates

In addition to federal taxes, employers must calculate and apply the appropriate state and local tax rates. The math works exactly the same, but the taxes levied by each state can vary dramatically. For example, seven states have no income tax at all. Others have state-specific equivalents of FICA and FUTA that employers will need to apply.

Choose your state below to find 2020 tax rates and other key information:

Select State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District Of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming


Payroll Taxes

payroll tax
Home Accounting Accounting for Taxes Payroll Taxes

Payroll taxes are taxes levied on employees and/or employers which must be deducted by the employer at the time of processing of payroll. In US, major payroll taxes include income taxes, FICA taxes (social security tax and Medicare tax), FUTA tax and SUTA, etc.

At the time of payment of salaries, employers deduct taxes borne by the employers, match them if required and deposit it in government treasury. The payroll expense equals the accrued gross salaries plus employer payroll taxes and the amount paid to employees is net of any employee payroll taxes.

Income tax

In US and many other countries, employers are required to withhold the income tax from its employees by working out income tax applicable to them the information they provide. The income tax withheld may differ from the ultimate income tax liability of the employee which is ascertained when he files his return.

Since income tax is a withholding, it has no expense implication for an employer. The employer just acts a conduit for transfer of income tax to the government. Periodic deduction from salary is more manageable for both the employees and the government because otherwise employees might be required to come up with a huger sum at the time of filing of return.

FICA taxes

FICA stands for Federal Insurance Contributions Act, the law the promulgates the taxes which are applicable to both employees and employers. It has two components: social security tax and Medicare tax.

Social security tax

Social security tax is a FICA tax charged to both employees and employers to fund the social security institution in the US. It is also referred to as Old Age, Survivors, and Disability Insurance.

The current social security tax rate is 12.4% which is equally shared by the employee and employer. The social security tax has an upper limit called social security wage base. The cap is $128,400 for 2018 and is adjusted periodically in line with cost of living adjustment. Social security tax is not applied to any income earned above the upper limit.

Example 1

Let’s say you have two employees: Mark earnings $110,000 per annum and Jane earnings $150,000. The social security tax withheld from Mark and Jane would be $6,820 ($110,000×6.2%) and $7,960.8 ($128,400×6.2%) per annum respectively. The employer will be required to make a matching contribution i.e. at 6.2%.

Please note that Jane’s annual income is $150,000 which is higher than the social security wage base. Hence, social security tax is applied only to the $128,400.

Medicare tax

Medicare tax is a flat tax applicable at the rate of 2.9% to all compensation income and shared equally by employees and employers. It means that 1.45% of the tax is deducted from employees and the other half is borne by the employers. It is also called federal hospital insurance tax.

There is no upper limit on Medicare tax un the social security tax. Individuals earnings more than $200,000 are liable to an Additional Medical Tax at the rate of 0.9% on income in excess of $200,000. The additional medicare tax does not apply to employers.

Example 2

In our example above, total annual Medicare tax would be $7,540 (=($110,000 + $150,000) × 2.9%) which would be equally shared by the employees and employers i.e. $3,770 would be deducted from salaries of Mark and Jane proportionately and an equal amount would be paid by the employer. Since no employee earns more than $200,000, no additional medicare tax is applicable.

Unemployment insurance taxes

Unemployment insurances taxes are levied by state and/or federal government on employers only as percentage with an upper limit. The federal unemployment insurance tax is also called FUTA tax where FUTA stands Federal Unemployment Tax Act, the law under which the taxes are promulgated. The state unemployment taxes are called SUTA taxes.

The state unemployment taxes are different in different state in terms of the tax rate and the base wage to which the tax applies.

The federal unemployment tax is applicable at the rate of 6% only to the first $7,000 of each employee’s annual wages. A maximum credit of 5.4% is applicable in relation to the state unemployment taxes paid.


Continuing the example above, let’s say the SUTA tax rate is 5.4%, the state unemployment tax obligation equals $756 (=2 × $7,000 × 5.4%). The FUTA tax offers a credit of maximum 5.4% in respect of state unemployment taxes paid. FUTA in this example would be $112 (=2 × $7,000 × (6.2% — 5.4%)).

Journal entries

The payroll taxes deducted from employees do not increase the total payroll expense because they decrease the net cash payment to employees.

The employer just acts a channel for collection of employee payroll taxes.

The employer taxes such as the matching amount of social security and medicare taxes and the unemployment insurance taxes are additional expense which results in increase in payroll expense.

Let’s assume income tax of $1,500 and $2,000 is required to be deducted from Mark and Jane each month on account of federal income tax. Using the figures from the examples above, the employer need to make the following journal entry to record the monthly payroll expense for Mark and Jane:

Account Dr Cr
Salaries expense21,667
Payroll taxes expense1,618
Income taxes payable3,500
FICA taxes payable3,092
SUTA tax payable63
FUTA tax payable9

The following table summarizes the necessary calculations:

Payroll Taxes Calculation Amount Calculation
Salaries expenseGS21,667Total annual compensation of $260,000 (=$110,000 + $150,000) divided by 12.
Income taxes payableIT3,500 information provided by each employee.
Social security taxes — deductedSSTD1,2326.2% of the ($110,000/12) and 6.2% of the monthly social security base wage ($128,400/12)
Social security taxes — employerSSTE1,232The employer is required to match the employee contribution for social security tax.
Total social security taxesSST = SSTD + SSTE2,463Sum of social security tax deducted and social security tax borne by employer.
Medicare tax — deductedMCD3141.45% of the monthly wages
Medicare tax — employerMCE314The employer is required to match the employee charge of medicare tax.
Total medicare taxesMC = MCD + MCE628Sum of medicare taxes deducted from employee and paid by employer
FICA tax payableFICA = SST + MC3,095Sum of social security tax and medicare tax
SUTA taxes payableSUTA63.005.4% of the first $7,000 annual wage (2 × $7,000/12 × 5.4%)
FUTA taxes payableFUTA9(6.2% — 5.4%) × $7,000/12 × 2
Payroll tax expensePT = SSTE + MCE + SUTA + FUTA1,620Sum of employer portion of social security tax and medicare tax and full amount of SUTA and FUTA
Net payment to employeesN = GS — IT — SSTD — MCD16,619It equals gross salary minus income tax deduction minus deduction of employee portion of social security tax and medicare tax

by Obaidullah Jan, ACA, CFA and last modified on Jun 6, 2018
Studying for CFA® Program? Access notes and question bank for CFA® Level 1 authored by me at

  • Social Security Tax
  • Medicare Tax


What Is Payroll Tax And How Much Does It Cost? | Xero

payroll tax

Employers are required to make several tax payments whenever they pay employees. These are known as payroll taxes. Most of the money comes the employee’s wage or salary, but some are paid by the employer, and some are shared.

Federal payroll taxes are the same for all US businesses. State payroll taxes change depending on where your business is, and where your employees live.

Start by figuring out your federal payroll tax, then ask the state tax agencies if they have any additional requirements. Do this for the state where your business is based, and the states where your employees live.

The four federal payroll taxes are:

  • Social security
  • Medicare
  • Unemployment tax
  • Income tax

Many states have their own versions of these taxes so check with your state agencies.

Social security tax rate and deductions

  • 12.4% of employee earnings.
  • Half (6.2%) comes their pay. The other half is paid by the employer.
  • The tax is deducted on employee earnings up to the annual wage limit set by the IRS. This limit can increase each year.

Medicare tax rate and deductions

  • 2.9% of employee earnings.
  • Half (1.45%) comes their pay. The other half is paid by the employer.
  • The employee’s tax rate increases by 0.9% when employee earnings pass $200,000 a year. There’s no increase in the employer rate.

Federal unemployment tax rate and deductions

  • Up to 6% of your employee’s first $7,000 in earnings.
  • It is paid completely by you, the employer.
  • The rate can drop as low as 0.6% if you pay state unemployment taxes on time.

Federal income tax is more complex than social security and Medicare. It’s paid completely from the employee’s earnings but the rate changes depending on how much they make. And your employees can claim “allowances” that lower their tax bill.

Employers are expected to deduct the right amount of income tax the employee’s earnings and the allowances they claim on their W-4. Slight unders or overs will be sorted out between the IRS and your employee when they complete their annual tax return.

You need four pieces of information to estimate income tax for an employee:

  • How often they’re paid (daily, weekly, bi-weekly, monthly)
  • Their marital status, as listed on the W-4 they fill out before starting work
  • The number of allowances they’re claiming, which is also on the W-4
  • The amount you’re paying them

There are a few methods for working out how much to withhold. One of the most common is the wage bracket method.

To use the bracket method for calculating income tax deductions, you:

  • search the IRS website for ‘IRS withholding tables’
  • find the IRS bracket that matches your employee’s pay frequency and marital status
  • go down the rows to find the amount you’re paying them
  • go across the columns to find the number of allowances they’ve claimed

The number at the intersection is what you should deduct from your employee’s salary or wage. There are other ways to work out how much employee tax to withhold, which you can find on the IRS website.

As we’ve seen, some payroll taxes come an employer’s expense account rather than the employee’s salary or wages. These are the federal employer payroll taxes:

  • Social security (half is paid by the employer)
  • Medicare (half is paid by the employer)
  • Unemployment (all of this tax is paid by the employer)

You will also have employer payroll taxes at state level. Every state collects an unemployment tax, for example. And some have more than that. Check with your state agencies to see.

Keep all of the employer payroll taxes in mind when budgeting to hire staff. They are additional costs, over and above salary and wages.

Some businesses pay benefits to their employees, such as healthcare insurance or retirement contributions. Some of those benefits are deducted before tax is calculated (in other words, they’re tax free), and others come after. You may also be required by law to take garnishments an employee’s pay.

For more on benefits and garnishments, check out our guide on payroll deductions.

Payroll tax deductions can change depending on an employee’s personal circumstances, such as marital status, and on the amount of money they’ve earned in a period. And because income tax rates change with earnings, you can’t easily use spreadsheet formulas to figure out what they owe from pay run to pay run.

For that reason, small businesses with several employees often use payroll software to do the math. As a bonus, these types of systems also auto-fill tax returns and allow you to file online.

Whatever system you use, make sure you update employee payroll records regularly. Your employees are supposed to tell you about important changes that affect their deductions, but they may not remember to. Ask them if anything on their W-4 has changed on a yearly basis.


Payroll Tax: What It Is, How to Calculate It

payroll tax

Editor’s note: on August 8, President Trump released an executive order that will allow a deferral of payroll taxes. You can read our summary on this and his other memorandums in less than 2 minutes.

The day you hire your first employee, you become responsible for payroll tax. Despite the name, payroll tax is not a single tax, but a blanket term used to refer to all taxes paid on the wages of employees.

If you have employees, you are going to be responsible for both:

  • Deducting a portion of employee wages to pay certain taxes on their behalf
  • Paying payroll taxes on each of your employees your own revenue

In this guide, we’ll show you how to calculate employer payroll taxes (the taxes you as the employer will pay) as well as how much employee tax to remit to the government. For a guide on how to do payroll, we’ve got you covered.

When you run payroll, you need to record it on your books. Learn more about how Bench can take care of that for you.

If you don’t have employees

If you run a small business but you don’t have employees, you’ll still have to remit payroll taxes—for yourself. This is called self-employment tax, and is effectively Medicare plus Social Security for yourself (which amounts to 15.3% of your net business income). Learn more in our simple guide on self-employment taxes.

Summary of payroll taxes

There are two types of payroll taxes: ones that come your own pocket, and ones that you just collect from employee paychecks and remit to the government.

Payroll taxes that you just collect and remit:

  • Federal income taxes
  • State and local taxes

We’ll cover each of these in detail, beginning with federal income tax withholding, since it’s the most commonly asked about.

What is the percentage of federal income tax withheld?

As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities.

To calculate how much of your employee’s federal income tax to withhold, you’ll need a copy of their Form W-4, as well as your employee’s gross pay.

Your next step is to determine the method you want to use to calculate withholding. Most employers have two options, the wage bracket method and the percentage method. While not exactly simple, the wage bracket method is the more straightforward way to calculate payroll tax.

How to calculate federal income tax withholding using the Wage Bracket Method

  1. In IRS Publication 15-A, find the tables marked “Wage Bracket Percentage Method Tables.” Use the table corresponding to your employee’s pay period.

  2. Check form W-4 to determine whether the employee files income tax as married or single and the number of allowances they claim.

  3. Find the employee’s gross wage for the pay period in columns A and B. The wage should be over the amount found in column A but under the amount found in column B.

  4. Subtract the amount found in Column C.

  5. Multiply the result by the percentage found in Column D.

  6. Check form W-4 to determine if the employee requests additional tax withheld from each paycheck. If they do, add that amount to the final number.

  7. The end result is the amount you should withhold from the employee’s paycheck for that pay period.

Source: IRS Publication 15-A

The Percentage Method is much more complicated—not recommended if you’re doing this alone. If you want to learn more about the Percentage Method, you can read all about both methods in IRS Publication 15-A.

Once you’ve figured out how much income tax to withhold from your employees’ paychecks, your next step is to figure out how much FICA to withhold (more on that below), and how much you’ll be required to pay on their behalf.

Calculating FICA

FICA stands for “Federal Insurance Contributions Act.” It’s a mandatory payroll tax deduction used to pay for programs Social Security (disability insurance, old age, survivors) and Medicare (covering health insurance for folks over 65).

When it comes to funding FICA, your employee pays 50% from their paycheck while you, the employer, pay 50% your own revenue. As the employer, you are required to withhold and pay the amount your employee is responsible for from her paycheck, and remit those funds on their behalf.

Current FICA tax rates

The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.

Combined, the FICA tax rate is 15.3% of the employees wages.

Do any of your employees make over $137,700? If so, the rules are a little different. Read more at the IRS website.

How to calculate FICA payroll tax

Social Security withholding

To calculate Social Security withholding, multiply your employee’s gross pay for the current pay period by the current Social Security tax rate (6.2%).

This is the amount you will deduct from your employee’s paycheck and remit along with your payroll taxes. (You can learn all you need to know about social security in our CPA reviewed blog post)

Example Social Security withholding calculation:

$5,000 (employee’s gross pay for the current pay period) x .062 (current Social Security tax rate) = $310 (Social Security tax to be deducted from employee’s paycheck)

Medicare withholding

To calculate Medicare withholding, multiply your employee’s gross pay by the current Medicare tax rate (1.45%).

Example Medicare withholding calculation:

$5,000 (employee’s gross pay for the current pay period) x .0145 (current Medicare tax rate) = $72.50 (Medicare tax to be deducted from employee’s paycheck

Employer matching

As an employer, you are responsible for matching what your employees pay in FICA taxes. So in this case, you would also remit $310 for Social Security tax and $72.50 for Medicare tax.

Calculating FUTA

FUTA stands for Federal Unemployment Tax Act. It’s an employer-paid payroll tax that pays for state unemployment agencies.

The FUTA tax rate is 6% on the first $7,000 of wages paid to employees in a calendar year. However, the actual rate that employers pay is actually 0.6%, since each state receives a credit to cover the remaining 5.4% of FUTA payments.

Unfortunately, some states are currently ineligible for the full credit. You can learn more in our guide to FUTA.


While FICA is a payroll tax that contributes toward Social Security and Medicare, FUTA (Federal Unemployment Tax Act) is an employer-paid payroll tax that funds state workforce agencies and unemployment insurance. Check out our full guide to FUTA for more info.

They also require different tax forms.

You’ll report FUTA on Form 940 — Employer’s Annual Federal Unemployment Tax Return at the end of the financial year.

You’ll report FICA quarterly using Form 941 — Employer’s Quarterly Federal Tax Return

How to make payroll tax payments

Calculating your payroll taxes is the hard part. Actually making the payments is easy.

You just enroll in the Electronic Federal Tax Payment System (EFTPS), then make your payment online. It’s the only way to make a payroll tax payment (mailing checks isn’t allowed).

You can access EFTPS here.

State and local payroll tax

Employers are also responsible for paying state and local (city, county, etc.) payroll tax on behalf of employees. As with federal payroll tax, part of this tax is employer paid and part is employee paid. Keep in mind that “employee paid” just means that you, the employer, withhold a certain amount from your employee’s paycheck and then remit it as part of your payroll taxes.

In addition to state payroll tax (State Unemployment Tax, or SUTA), employers are also responsible for remitting state income tax on behalf of their employees. Have all your SUTA questions answered in just a 3 minute read.

State and local payroll taxes are governed at the state and local level, and every state’s payroll tax rules are different. The Federation of Tax Administrators published a list of each state’s taxing authority. You can find out more about payroll tax in your state and local area there.

You can outsource payroll tax

Payroll tax is complex. The calculations are nitpicky and penalties are steep. Even paying payroll taxes just a day late comes with a 2% penalty on the amount due, with that penalty rising as high as 15% for past due payroll taxes.

We highly recommend outsourcing your payroll to a company Gusto. They’ll take the headache everything from paying your employees the right amount at the right time, to handling pesky withholding calculations and payroll taxes.

When it comes time to record payroll costs on your books, Bench can take care of that for you. Learn more about how we are saving small business owners hours of admin every month.

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Income Tax vs Payroll Tax | Top 5 Differences (with infographics)

payroll tax

Income tax is the tax imposed by government authorities on the net income earned by the individuals or business entities which is progressive in nature where the person earning higher income has to pay income tax at higher rate of interest and vice versa, whereas, Payroll tax refers to the tax which includes social security tax, taxes for medical care and unemployment taxes etc. where such tax is contributed by both employer and an employee.

Employers are responsible for holding part of the wages given to the employees as employment taxes. Employment taxes are deducted from the employee’s gross wages, and they are of two types.

  • Income tax consists of the local, state, and federal taxes. The taxes vary from place to place as some localities charge an additional local income tax. Most states have their state income tax and payroll tax. The federal income taxes can be exempted by claiming on Form W-4. The employer holds back a part of the income. This portion of the tax is due to be paid either to the local, state, or federal department. Once the tax dues are paid, the employers pay back this withheld income to the employees.
  • Payroll taxes consist of unemployment taxes and social security taxes. It is the type of tax where both the employer and the employee contribute towards it. Medical care taxes and social security taxes together are also known as FICA (Federal Insurance Contributions Act) tax. The social security tax that the employee pays determines the monthly payments he/she gets after their retirement. The Federal Unemployment Tax Act (FUTA) provides insurance if a previous employee is unemployed, and the Medicare tax provides the cost of medical expenses after the employee retires at the age of 65.

Income Tax vs. Payroll Tax Infographics

Let’s see the top differences between Income Tax vs. Payroll Tax.

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Key Differences

  • One of the main differences is the person that contributes towards them. When we look at income tax, the whole tax amount is for the employee to pay. Whereas when you look at payroll tax, both the employer and employee share the tax amount equally between them.
  • Income tax consists of taxes that the employees pay for the location ( a local tax that is paid for the locality where you stay), the state tax that you pay for the state that you live in, and the federal tax for the government. Payroll tax consists of taxes medical care tax, unemployment tax, and social security tax.
  • Income taxes are taxes for various incomes that a person receives. Apart from wages, it can be through rent from their own house or through investments made in shares or through interest from banks, etc.

    Payroll taxes are generally calculated only through the wages of the employee that is the income that a person receives through his job/employment. This income can be paid weekly or monthly or even daily.

  • Income tax is more of a progressive tax because as the salary of the employee increases, the income tax is also increased by the level of income slabs that are pre-determined. Comparatively, the payroll tax is a regressive tax as the slabs are fixed such that high-income people pay as much as the low-income people.
  • Income taxes are generally paid for the governments to function. Payroll taxes mostly benefit the taxpayers directly as these taxes are going to help them in Medicare and retirement funds. Even though income taxes help the taxpayers indirectly in some way, the payroll tax is the one that helps the taxpayers directly.

Income Tax vs. Payroll Tax Comparative Table

Basis for ComparisonIncome TaxPayroll Tax
ContributorsOnly employee.Both employer and employee.
Consists of Federal, state, and local tax;Medicare tax, unemployment tax, and social security tax;
Source Incomes from various sources are taken into consideration over the year.Income from wages can only be considered.
Nature of taxProgressive Tax.Regressive Tax.
PurposeMore for contribution to the government, society at large;More for employee’s future benefits;

Final Thoughts

We know that both taxes have their differences, but both tax amounts are withheld by the employers while giving the wages. Both taxes are being made to pay for different reasons, and we need to know how much taxes we pay and how they are split. Understanding the differences will help us figure out each type of tax and how they work.

This article has been a guide to Income Tax vs. Payroll Tax. Here we discuss the top differences between them along with infographics and comparative table. You may also have a look at the following articles –


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