Introduction to Payroll Taxes
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff. Payroll taxes generally fall into two categories: taxes that employers are responsible for paying, and taxes that employers are responsible for withholding from employee paychecks.
Federal Income Tax Withholding
Federal income tax is withheld from employees' wages based on the information they provide on their Form W-4 and the IRS tax tables. The amount withheld depends on the employee's income level, filing status, and the number of allowances claimed.
Employers are required to withhold federal income tax from employee paychecks and remit it to the IRS on behalf of their employees. This withholding serves as a prepayment of the employee's annual income tax obligation.
FICA Taxes: Social Security and Medicare in 2025
FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare programs. Both employers and employees contribute to these taxes. For a detailed breakdown, see our FICA Tax Explained article.
- Social Security tax: For 2025, the Social Security tax rate remains at 6.2% for both the employer and employee on the first $168,600 of wages (this wage base limit is adjusted annually for inflation, up from $160,200 in 2023).
- Medicare tax: The Medicare tax rate continues to be 1.45% for both the employer and employee, with no wage base limit. Additionally, employees earning more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% Medicare surtax.
State and Local Income Taxes
In addition to federal taxes, many states and some local jurisdictions impose their own income taxes. The rates and rules vary widely by location. For a comprehensive comparison, see our State Income Tax Comparison article.
- Some states have a flat tax rate that applies to all income levels.
- Others have progressive tax systems with rates that increase as income rises.
- Nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire (on earned income), South Dakota, Tennessee, Texas, Washington, and Wyoming.
- States like Florida and Georgia have different approaches to taxation that affect your take-home pay.
Employer-Only Payroll Taxes
Some payroll taxes are the sole responsibility of employers and are not withheld from employee wages:
- Federal Unemployment Tax Act (FUTA): This tax funds unemployment compensation for workers who lose their jobs. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the year. Employers who pay their state unemployment taxes on time may receive a credit of up to 5.4%, reducing the effective FUTA rate to 0.6%.
- State Unemployment Insurance (SUI): States also collect unemployment taxes from employers to fund their unemployment insurance programs. Rates vary by state and may be experience-rated, meaning employers with more former employees claiming unemployment benefits pay higher rates.
Calculating and Reporting Payroll Taxes
Employers are responsible for calculating, withholding, and remitting payroll taxes to the appropriate government agencies. This typically involves:
- Calculating the correct amount of taxes to withhold from each employee's paycheck.
- Depositing withheld taxes and employer contributions with the IRS and state tax agencies according to a deposit schedule (usually monthly or semi-weekly).
- Filing quarterly employment tax returns (Form 941) with the IRS.
- Providing employees with W-2 forms by January 31 each year, summarizing their wages and tax withholdings for the previous year.
Conclusion
Understanding payroll taxes is essential for both employers and employees. For employers, proper management of payroll taxes is a legal obligation that carries significant penalties for non-compliance. For employees, understanding how payroll taxes affect their take-home pay helps with personal financial planning and ensures they're not surprised by unexpected tax bills at year-end.
Using a reliable payroll calculator can help both parties estimate tax withholdings and plan accordingly. Our PayrollCheck Calculator provides accurate estimates of take-home pay after accounting for federal, state, and FICA taxes. For more information on optimizing your withholdings, see our Tax Withholding Strategies article.