As your business grows and takes on more responsibility, the need to hire and manage employees increases. While delegating tasks to staff may take some work off your plate, hiring employees comes with additional administrative challenges.
One of the most significant challenges faced by employers is payroll taxes. The process requires tracking employees’ pay, calculating their payroll taxes, filing federal (and possibly state) payroll tax returns, and making tax payments to the government.
This article is here to help you out. We break down what payroll taxes are, how to calculate them for your employees, and how to withhold and pay several different types of payroll taxes. Plus, we give you the tools to manage your payroll taxes effectively and efficiently.
Key Takeaways
- Payroll taxes include FICA (which includes Social Security and Medicare), FUTA, and SUTA taxes.
- FICA is the Federal Insurance Contributions Act, FUTA the Federal Unemployment Tax Act, and SUTA the State Unemployment Tax Act.
- FICA taxes are paid 50% by employers and 50% by employees, while FUTA and SUTA taxes are paid 100% by employers.
- FUTA and SUTA taxes are paid annually, while FICA taxes are paid quarterly.
What Are Payroll Taxes?
Payroll taxes are the taxes employers are required to pay to federal (and sometimes state) governments to help fund various employment-related social programs.
Most notably, federal payroll taxes are used to fund FICA (the Federal Insurance Contributions Act), which consists of Social Security and Medicare. Social Security supports retired workers in the US by guaranteeing them income during their retirement years, while Medicare offers free or discounted health insurance and other medical plans to retired workers.
Without payroll taxes, these social programs would cease to exist, and retired workers would lose the financial support they rely on to enjoy their golden years.
Payroll taxes are paid by both the employer (this is referred to as the “employer portion”) and the employee (the “employee portion”), and every employee and employer is responsible for paying their share of payroll taxes. Additionally, anyone working as an independent contractor is responsible for paying both the employer and employee half of FICA taxes.
What Are the Different Types of Payroll Taxes?
Payroll taxes are made up of several individual taxes, each with its own rate. They include:
- FICA (Federal Insurance Contributions Act) taxes comprising Social Security taxes of 12.4% and Medicare taxes of 2.9%
- FUTA (Federal Unemployment Tax Act) taxes of 0.6% (for employees in most states)
- SUTA (State Unemployment Tax Act) taxes, which vary by state
Let’s explore the payroll taxes that employers, employees, and independent contractors are responsible for.
Payroll Taxes Paid by Employers
Employers are responsible for paying several payroll taxes, including FICA, FUTA, and SUTA. These taxes break down as follows:
- Employer portion of FICA: Both employers and employees are responsible for paying FICA taxes, and they each pay half. Employers pay their own portion of the tax, and they generally withhold the employee’s portion from their paycheck. The employer portion of FICA taxes includes 6.2% for social security taxes and 1.45% for medicare taxes.
- FUTA: Employers are responsible for paying the entire FUTA tax, and they don’t withhold any portion of this tax from employees’ paychecks. This tax rate is technically 6%, but federal credits automatically reduce it to 0.6% for employees in most states. FUTA tax is imposed on the first $7,000 of each employee’s gross income. Employers in some states (California, Connecticut, and New York for 2024) will have to pay up to 0.15% in FUTA taxes.
- SUTA: Similarly to FUTA, employers are responsible for paying the entire SUTA tax, and they don’t withhold any portion of this tax from employees’ paychecks. This tax is imposed at a state level, so the tax rates will vary by state, and some states may not have a SUTA tax at all. Be sure to check with each employee’s state taxing authority to determine if you’re required to pay this tax.
Payroll Taxes Paid by Employees
- Employee portion of FICA: Employers and employees are each responsible for paying half of Social Security and Medicare taxes. As a result, employees are responsible for paying 6.2% for Social Security and 1.45% for Medicare. Generally, the employer will withhold these taxes from the employee’s paycheck.
- FUTA: Employees aren’t responsible for paying FUTA taxes.
- SUTA: Employees aren’t responsible for paying SUTA taxes.
- Income taxes: Employees, not employers, are responsible for paying federal (and potentially also state) income taxes based on their individual income tax rates. Employers will often withhold these taxes from their employees’ paychecks.
Payroll Taxes Paid by Independent Contractors
- FICA: Contractors must pay 100% of all FICA taxes. As a result, they’re responsible for paying 12.4% for Social Security and 2.9% for Medicare.
- FUTA: Contractors aren’t required to pay FUTA taxes.
- SUTA: Contractors aren’t required to pay SUTA taxes
- Income Taxes: Independent contractors are responsible for paying federal (and potentially also state) income taxes based on their individual income tax rates.
How To Calculate Payroll Taxes?
Determine Taxable Compensation for All Employees
The first step to calculating your payroll taxes is to categorize which of your workers are employees and which are independent contractors. If you don’t know whether workers should be classified as employees or independent contractors, check out the IRS’s guide to determining worker classification.
Once your workers are classified correctly, begin adding up the amount of compensation you pay to each of your employees. Compensation can include salaries, hourly wages, tips, bonuses, and gifts, so be sure to include all of these amounts in your calculation.
Additionally, be sure to subtract any unreimbursed job-related expenses that the employee incurred while working for you, as these reduce taxable income. If they incurred any expenses that you did reimburse, then those don’t need to be included as they don’t affect the employee’s income.
Once you know how much you pay each of your employees, move on to step two.
Determine Payroll Tax Liability
Next, you’ll need to multiply the amount you pay each employee by each of the payroll tax rates we mentioned above—FICA, FUTA, and SUTA. You can use the formulas below:
Social Security Tax (FICA): The total Social Security tax rate is 12.4%, and the maximum earnings subject to Social Security tax are $168,600 in 2024:
Employee earnings of $168,600 or less × 12.4% = Social Security Tax
Medicare Tax (FICA): The total Medicare tax rate is 2.9%. Medicare tax doesn’t have an earnings limit like the Social Security tax. Wages over $200,000 are subject to an additional 0.9% medicare tax:
(Employee Earnings × 2.9%) + (Earnings over $200,000 × 0.9%) = Medicare Tax
FUTA Tax: FUTA tax is effectively 0.6% of the first $7,000 paid to each employee (except for CA, CT, and NY, which charge 0.15%).
Most states: Employee Earnings up to $7,000 × 0.6% = FUTA Tax
SUTA Tax: Similarly to the FUTA tax, if your state imposes a state unemployment tax—and most states do—then you’ll need to multiply each employee’s wages by the SUTA tax rate of the state they reside in.
Withhold the Employee Portion
Most employees will opt to have their employer withhold and pay taxes on their behalf, rather than paying it themselves. For all employees who choose to do this, you’ll need to withhold one-half of Social Security and Medicare taxes from their paychecks. Make sure you track these amounts in a dedicated account because you’ll need to pay them to the IRS on the employee’s behalf in the next step.
Employers are responsible for paying 100% of any FUTA or SUTA tax due, so don’t withhold those amounts from your employees’ paychecks. Instead, simply save those amounts from your own funds.
Pay the Tax
Finally, it’s time to pay the taxes due. You’ll need to send the IRS your 50% of the Social Security and Medicare taxes, the employees’ 50% of those taxes that you withheld in step three, and 100% of FUTA taxes due. You may also need to pay SUTA taxes to any applicable state tax authorities, or potentially to multiple states if your business operates and pays employees in more than one.
In the next section, we’ll dive into how and when you need to file payroll tax returns and pay the taxes due.
How and When To Report Payroll Taxes
Some payroll taxes are reported to the IRS quarterly using Form 941, while others are reported on an annual basis using Form 940. Let’s explore both of these forms and how to file them.
Form 941 Quarterly Payroll Tax Return
The IRS requires employers to report income taxes and FICA taxes (Social Security and Medicare tax) every quarter using Form 941, “Employer’s Quarterly Federal Tax Return.”
Form 941 reports general information such as your business name, address, and EIN, as well as payroll information such as your employees’ income tax withholdings, Social Security taxes, and Medicare taxes.
Form 941 is due by the end of the month following the end of each quarter, and the IRS charges penalties for late filing and late payment, so make sure you file this form and pay any taxes due on time. Form 941 due dates are as follows:
| Months in each quarter | Form 941 due on |
| First quarter: January, February, March | April 30th |
| Second quarter: April, May, June | July 31st |
| Third quarter: July, August, September | October 31st |
| Fourth quarter: October, November, December | January 31st (of the next year) |
If you need to make a tax payment when you submit Form 941, then you can either use the Electronic Federal Tax Payment System (EFTPS) or fill out and mail the payment voucher, Form 941-V, which is included with Form 941 and looks like this:
Form 940 Annual Payroll Tax Return
The IRS requires employers to report their FUTA tax due on an annual basis using Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return.”
Form 940 reports general information such as your business name, address, and EIN, as well as payroll information such as total wages paid to employees, the FUTA tax calculation (mentioned above), and total FUTA taxes owed. It includes a step-by-step process to walk you through this calculation.
Form 940 is due by January 31st of the year following the calendar year in question. So, the 2023 Form 940 was due by January 31st, 2024, and the 2024 Form 940 is due by January 31st, 2025.
If you need to make a tax payment when you submit Form 940, then you can either use the Electronic Federal Tax Payment System (EFTPS) or fill out and mail the payment voucher, Form 940-V, which is included with Form 940 and looks like this:
Payroll Tax Payment Schedules
The IRS wants taxpayers to be able to manage their tax liabilities on an ongoing basis. To do this, they offer payment plans for various types of taxes. Depending on your payroll tax situation, the IRS prescribes multiple potential deposit schedules.
- Monthly deposits: If you reported payroll taxes of $50,000 or less during the last 12 months, the IRS allows you to deposit your payroll taxes for each month by the 15th day of the following month.
- Semiweekly deposits: If you reported payroll taxes of more than $50,000 during the last 12 months, the IRS allows you to deposit your payroll taxes based on when payroll is processed:
- If your payday is on Wednesday, Thursday, or Friday, you must deposit payroll taxes by the following Wednesday.
- If your payday is on Saturday, Sunday, Monday, or Tuesday, you must deposit payroll taxes by the following Friday.
- Once-annual deposits: If you pay less than $1,000 in payroll taxes each year, the IRS allows you to skip monthly or semiweekly schedules and just pay once per year.
What Happens if You Don’t Pay Your Payroll Taxes on Time?
Neglecting to either file your payroll tax returns or pay taxes due can result in receiving harsh penalties from the IRS.
The IRS imposes two main types of penalties: failure to file penalties and failure to pay penalties. Let’s discuss both below.
Failure To File Penalty
Failing to file either Form 940 or Form 941 can result in the IRS charging a penalty of 5% of unpaid taxes due for each month (or part of a month) that your tax return is late, up to a maximum of 25% of the unpaid tax.
Failure To Pay Penalty
Failing to pay taxes due with Form 940 or Form 941 can result in the IRS charging a penalty of 0.5% of unpaid taxes due for each month (or part of a month) that your tax payment is late, up to a maximum of 25% of the unpaid tax.
If you don’t pay taxes and penalties due within 10 days of receiving either an IRS notice or an intent to levy, then the failure to pay penalty will increase from 0.5% to 1% per month.
Conclusion
While tracking your employees’ pay, calculating their payroll taxes, and filing payroll tax returns might sound like a frustrating and time-consuming task, the process is more manageable than you think.
In this article, we learned what payroll taxes are, how to calculate them for your employees, and how to withhold and pay the different types of payroll taxes (FICA, FUTA, and SUTA). To speed up your administrative tasks, save resources, and avoid errors, consider automating your processes with the best payroll software.
FAQs
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References
Robbie Mizzone
EditorRobbie holds a BSc in Accounting and Finance from Centenary University, New Jersey. He's worked for banks and private companies alike, including Kering (Gucci, Balenciaga), focusing on financial reporting, account reconciliation, and complex accrual analysis. An avid explorer and jack of all trades, Robbie's garnered experience in luxury hospitality, carpentry and construction, and is now backpacking solo around the world.
