Both employers and employees are responsible for payroll taxes. Federal tax rates, like income tax, Social Security (6.2% each for both employer and employee), and Medicare (1.45% each, plus an additional 0.9% withheld from the wages of an individual paid more than $200,000), are set by the IRS. However, each state specifies its own tax rates, which we will cover in more detail below.
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Federal Payroll Tax Rates
There are two categories of employment taxes at the federal level in addition to income tax: FUTA and FICA. We’ll cover each briefly, as you’ll process these as tax deductions on employees’ paychecks. You must also pay these taxes on your employees’ behalf, regardless of the state in which you operate.
- Income Tax: The tax rate is based on withholdings chosen on the employee’s W-4 form. Note that payroll taxes are NOT the same as income tax.
- FUTA: This 6% federal tax on the first $7,000 of each employee’s earnings is to cover unemployment; in most cases, you’ll be credited back 5.4% of this amount for paying your state unemployment taxes on time, resulting in a net tax of 0.6%. Learn more in our guide to FUTA and how to file it.
- FICA: This 15.3% federal tax is made up of two parts: 12.4% to cover Social Security and 2.9% to cover Medicare. Social Security has a wage base limit, which for 2023 is $160,200. For employees earning more than $200,000, the Medicare tax rate goes up by an additional 0.9%; therefore, FICA can range between 15.3% and 16.2%. Check out our FICA tax guide for more information.
State Payroll Tax Rates
Some states have an income tax; others (like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) don’t. However, all states have state unemployment taxes.
Check out our state payroll directory for specific state-by-state payroll tax rate information. You’ll find whether your state has an income tax and any local taxes.
The percentage of State Unemployment Tax (or, SUTA) varies by state. Each state determines the wage base or minimum earnings required for SUTA to be deducted. Others may refer to it as unemployment insurance (UI).
Also, the SUTA rates are affected by an employer’s specific unemployment history and industry. Besides, some states assign a generic new employer rate that may be higher or lower than what the employer will pay once it has been in business for a period of time, and each state determines the time frame. For example, if one employer has higher unemployment claims than another, that employer will pay a higher unemployment rate.
Below, are the most common state taxes that employers need to be aware of:
Some states tax supplemental wages, like bonuses, commissions, overtime, and severance pay. Less than half of US states have no supplemental tax, while the rest range from 1.84% to 11%—except Vermont, which charges 30%. For instance, in California, employees are taxed 6.6% for most supplemental pay but are taxed at 10.23% if the supplemental pay is received from a bonus or stock option.
Workers’ compensation is purchased as private insurance by business owners in most states. However, states like New Mexico, Oregon, and Washington require it to be paid as a tax. As an example, Oregon employees pay 1.1 cents per hour, while their employers match that rate for a total of 2.2 cents an hour paid to Oregon to cover state-managed workers’ compensation.
For more information on workers’ compensation and where to purchase it, check out our guide on workers’ comp.
Disability insurance differs from workers’ compensation, which covers on-the-job injuries only, by covering all injuries and health issues that affect an employee’s ability to work. Some states, like California, Hawaii, and New York, ensure that workers in their state have disability insurance coverage. Therefore, that additional insurance is included as a tax in those states. Rhode Island, for example, levies a tax rate of 1.1% on the first $84,000 in wages.
Some states have begun to mandate employer-provided sick leave or paid sick time off, which means it operates like a tax. New York, for example, deducts 0.455% of the employee’s wages each pay period to cover paid leave for employees in that state.
Make sure you’re aware of any paid leave laws in the state or city where you have employees. Remember, the laws you need to follow are the ones where your employee lives and works, if they work remotely.
Looking to know more about paid leave laws and policies specific to your state? Check out our state payroll directory and paid sick leave by state directory.
How to Pay Federal & State Payroll Taxes
It’s best to set aside money for employment taxes each pay period, even if you’re only required to send payment monthly. You definitely need to withhold money from your employees’ paychecks each period.
You will either need to deposit payroll taxes on a monthly or semiweekly basis. If you owed $50,000 or less in taxes for the prior year, you can pay monthly; anything more than that puts you on a semi weekly pay schedule. If you’re a new employer, you’re automatically placed on a monthly deposit schedule. For employers with very little payroll tax obligation (less than $2,500 a quarter), deposits can be made quarterly with the 941 tax return.
Federal Employment Tax Due Dates
If you determine your business needs to be on a monthly deposit schedule, you’ll need to deposit your employment payroll taxes (FICA and federal income taxes) by the 15th of the following month for which they’re due. Semiweekly schedules require that taxes for wages paid Wednesday, Thursday, or Friday be made by the following Wednesday. For wages paid on other days of the week, tax payments should be made by the following Friday.
Semiweekly Deposit Schedule
When payday falls on a: | Deposit taxes by the following: |
|---|---|
Wednesday, Thursday, and/or Friday | Wednesday |
Saturday, Sunday, Monday, and/or Tuesday | Friday |
One important thing to note is that if you accumulate $100,000 or more in taxes, regardless of your deposit schedule, you must deposit the taxes by the next business day.
Quarterly Tax Payment Due Dates
Quarterly FUTA taxes are due if you owe more than $500 in taxes each quarter.
The due dates are:
- Quarter One: April 30
- Quarter Two: July 31
- Quarter Three: Oct. 31
- Quarter Four: Jan. 31
However, SUTA tax due dates vary by state. For example, in Michigan, the taxes are due on the 25th of the month instead of the end of the month: April 25, July 25, Oct. 25, and Jan. 25.
Failing to meet the deadline may result in a penalty or late tax payment interest assessment. Therefore, you not only have to know what taxes to withhold and pay but also when and how to pay it—by state.
Filing Tax Forms
To file employment taxes with the IRS and other agencies, you’ll need to use specific payroll tax forms so it’s clear what and how much you are paying; the forms have formulas that will help you calculate how much you owe, and the typical filing requirement is quarterly or annually.
You’ll need the following payroll forms when you file your employment taxes:
- IRS Form 941 or Form 944 for federal income and FICA taxes
- Form 940 for federal unemployment taxes
- State income and/or disability tax forms, if applicable to your location
- Municipal or local tax forms, if applicable to your location
Not sure what payroll forms you need on-hand? Check out our in-depth guide for the nine major payroll forms every employer needs.
You must deposit the taxes by the respective due date to avoid interest and penalties and maintain compliance with payroll laws. If you pay independent contractors at least $600 in a calendar year, you won’t need to pay or file taxes for them, but you will need to send in a 1099-NEC form to the IRS (and the contractor) to show the total earnings you paid them throughout the year.
To see a bigger picture of how you should be processing payroll even beyond managing payroll taxes, check out our step-by-step guide on how to do payroll. If you have remote workers, then check our guide on how to do payroll for remote employees.
Penalties for Missing or Late Employment Tax Payments
If employers fail to remit payroll tax payments or send them in late, it could have the following impact:
- Employers may face criminal and civil sanctions
- Employees may lose access to future Social Security or Medicare benefits
- Employees may lose access to future unemployment benefits
If you’re late making deposits for FICA or federal taxes, you’ll be charged penalties as follows:
Penalty | Reason Charged |
|---|---|
2% | 1 to 5 days |
5% | 6 to 15 days |
10% | 16 or more days but before 10 days from the date of the first IRS notice |
10% | Amounts that should have been deposited, but instead were paid directly to the IRS or paid with your tax return |
15% | Amounts still unpaid more than 10 days after the date of the first IRS notice or the day you receive notice and demand for immediate payment |
Payroll Tax Rates Frequently Asked Questions (FAQs)
What’s the difference between payroll tax and income tax?
Payroll and income taxes are both withheld from an employee’s wages—but they fund different government programs and are calculated differently. At the federal level, income tax is a progressive tax that’s determined based on an individual’s income level, filing status, and deductions or credits. It funds general government revenue used for various programs and services. The amount of income tax withheld varies from person to person.
Payroll tax is a flat rate tax that every employee pays, regardless of their income level. Payroll taxes fund Social Security and Medicare programs, and the tax payments are shared between employees and employers.
Are there any payroll tax credits for small businesses?
There are several tax credits available to small businesses:
- The Small Business Health Care Tax Credit1 is available to eligible small employers who provide healthcare to their employees. To qualify, you must have fewer than 25 full-time employees with an average salary of $56,000 or less per year, offer healthcare to all full-time employees, and pay at least 50% of the premium costs.
- The Work Opportunity Tax Credit2 is available to employers who hire individuals from certain targeted groups, including veterans, ex-felons, and individuals receiving government assistance. The credit can be as high as $9600 per employee.
There are many more small business tax credits, with some available at the state and local levels. Make sure to look into any that may be available to you since these tax credits can reduce your tax liability dollar for dollar, making them a valuable tool for saving money.
Do I need to withhold payroll taxes for remote employees?
If you have remote or out-of-state employees, you generally need to withhold state and local taxes based on where the employee performs the work. This can be complicated if you have employees working in multiple states or if an employee moves during the year.
You’ll need to register with each state where you have employees working and follow that state’s rules for withholding and remitting taxes. Some states have reciprocal agreements, which allow employees living in one state and working in another to only pay tax to their home state.
In addition to state taxes, some cities or counties also impose local income taxes. You’ll need to check the local tax rules in the areas where your employees work.
Bottom Line
Paying your payroll taxes correctly and on time is an important part of becoming a successful employer, but it can become challenging as you grow. Tax rates change from year to year, especially state payroll tax rates, and you must keep track of them to accurately calculate your business and your employees’ tax obligations. In today’s remote working environment, it’s even more confusing since you have to understand and adhere to the tax regulations where your employees live and work.
Using a payroll provider like Gusto will help ensure you are always up-to-date on federal, state, and local payroll tax rates. The system calculates taxes according to federal and applicable state tax rates in its database. In addition, it files the taxes to the IRS and other tax agencies at no extra cost to you. Try it free today.
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