What is Payroll Tax?

Payroll tax is the tax that is deducted from an employee’s salary which is mandatory and is paid both by the employee and employer. Income from this taxation serves to cover the cost of essential governmental programs like Social Security, unemployment insurance, and others.

There are two parts of payroll taxes:

• Employee payroll taxes – taken directly from an employee’s salary.
• Employer payroll taxes – paid by the employer to the government separately from the employee’s wages.

These taxes are collected by the federal, state, and sometimes local levels of government.

Types of payroll taxes

• Social Security Tax – This tax is collected to be able to pay retirement and disability benefits.
• Medicare Tax – This tax is used to finance the healthcare of people who are 65 years old and over.
• FUTA (Federal Unemployment Tax Act) – This tax is levied on the employers to support the unemployment benefits.
• SUTA (State Unemployment Tax Act) – This tax is different in each state and is also paid by the employers.
• Additional State/Local Payroll Taxes – The place where your business is located can also demand to pay their tax.

How much is Payroll Tax?

The payroll tax rate depends on a few factors, including federal rules and your state’s tax laws. Here’s a simplified example of the federal portion as of 2025:

Type	Employee Pays	Employer Pays
Social Security	6.2%	6.2%
Medicare	1.45%	1.45%
FUTA (Federal)	–	0.6%
SUTA (State)	–	Varies

Total: Employees pay around 7.65%, and employers pay around 7.65% + FUTA + SUTA, depending on your state.

Employees earning above a certain threshold may also be subject to an Additional Medicare Tax of 0.9%.

Why understanding payroll taxes matters

If you’re a business owner, having an understanding of the operation of payroll taxes will enable you to:

• Avoid IRS penalties
• Budget for total employee compensation
• Keep employees happy and legally protected
• Maintain proper financial records

Incorrectly handling payroll taxes can be very costly mainly in the form of fines, audits, and legal ramifications, thus it is best to be ahead of the game.

Employer Payroll Taxes: Your Responsibilities

When employing people, it is important to remember that tax deductions are not the only duty of the employer. Additionally, you are supposed to:

• Compute and hand over the employer’s part of the payroll taxes
• Present payroll tax reports after every quarter and annually to the state authority
• Deposit money to tax agencies without delay
• Furnish W-2 forms to workers

The majority of the small businesses employ payroll software or payroll services to ensure that following the law and having an appropriate payroll are being undertaken properly and accurately.

Final Thoughts

Payroll taxes may not seem like a big deal, but they are one of the vital factors for your company. From employee benefits to government compliance, these are the things you can not afford to ignore.

The primary thing which matters whether you manage payroll in-house or use a service is to have a clear point of view over how costly payroll taxes can be and what your duties as an employer are. By staying updated on employer payroll taxes, you save your business from expensive errors and give it the green light for growth.

Also Read:

• How to Do Payroll for a Construction Company?
• What Happens If a Company Can’t Make Payroll?
• Who Is Responsible If a Payroll Check Bounced?
• How to Reconcile Payroll?
• How to Fix Payroll with AI?

Frequently Asked Questions