Payroll taxes are federal and state taxes deducted from an employee’s wages or salary. These taxes fund a variety of federal and state programs, including Social Security, Medicare, and unemployment insurance. The federal employment tax rate is 15.3%, with employees and employers each paying half.
In addition to the payroll tax, state and local income taxes vary by location. You should consult your accountant about payroll taxes in your specific area of the country. You may also be required to pay workers’ compensation, disability benefits, and other state and local requirements.
The main federal employment taxes are Social Security and Medicare. These are known collectively as FICA, for the Federal Insurance Contributions Act that covers these taxes. Both employees and employers pay these taxes, which are reflected on paycheck stubs as wage deductions. Social Security pays for old-age, survivors, and disability insurance, while Medicare provides health care coverage.
If you’re an employer, you may also be liable for State Unemployment Tax (SUTA), which is paid separately from the federal employment tax. This tax is based on the average weekly wage of your eligible employees and can vary from year to year.
The SUTA rate is calculated annually based on your experience, which is determined by dividing your benefit charges and taxable payroll over the three most recent complete fiscal years. The benefit ratio and taxable payroll are based on the information you provide in your SUTA account, which you can obtain by reviewing your UC-2116 Tax Rate Notice for each year.
How Does Employment Taxes Work?
Generally speaking, all employers are responsible for paying employment taxes on their employees’ wages. These taxes pay for benefits such as Social Security and Medicare. They also pay for federal unemployment insurance (FUTA) and state unemployment insurance. In some states, local income tax withholdings may also be required. Consult a local accountant to understand your state’s requirements.
The IRS uses employment taxes to fund the Social Security system, and state and local governments use their revenues to pay for workers’ compensation and other services. However, the exact amounts collected and the tax rates vary by state. Some local government agencies may also collect additional payroll taxes for things like workforce development or transit.
Employers must also pay their employees FICA taxes (Federal Insurance Contributions Act). These are 6.2 percent for both employer and employee for the 2024 rate, which covers Social Security and Medicare contributions. The total taxable amount is capped at an annual wage base limit of $147,000 for this year.
In addition, employers must also pay state and federal unemployment taxes, which are based on a different set of factors. Generally speaking, these taxes are calculated as a percentage of the total subject wages paid by the employer, but they’re capped at a maximum wage base and tax rate.
Independent contractors and self-employed individuals are not considered employees, but they still must pay employment taxes on their wages. These are known as self-employment (SE) taxes, and they’re equivalent to FICA taxes. The wage base limits for these taxes are capped at the same levels as the FICA wage base limits. In addition, SE taxes are subject to a modified rate that includes charges for closed businesses, excess charges for high-cost employers, and a solvency factor.