Payroll Tax
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
Taxes withheld from employee wages for Social Security and Medicare, plus employer-side employment taxes.
Payroll taxes are the bundle of employment taxes withheld from employee wages and matched or paid solely by employers. The core federal pieces are: (1) FICA — Social Security tax of 6.2% on wages up to the annual wage base (verify the current year's wage base with the SSA; it adjusts annually for inflation) and Medicare tax of 1.45% on all wages, both matched dollar-for-dollar by the employer; (2) Additional Medicare Tax of 0.9% withheld from employee wages above $200,000 (not matched); (3) FUTA (federal unemployment) of 6.0% on the first $7,000 of each employee's wages, typically reduced to 0.6% after the 5.4% state credit — employer only; (4) state unemployment insurance (SUTA), employer only and experience-rated. Employers must also withhold federal and state income tax under Form W-4 elections. Deposits follow IRS schedules (monthly or semi-weekly based on lookback period, with next-day deposit required when liability exceeds $100,000). Reporting is on Form 941 quarterly and Form 940 annually. See IRS Publication 15 (Circular E) for current rules.
Formula
FICA Per Employee = 6.2% (Social Security, up to wage base) + 1.45% (Medicare, all wages) = 7.65% of wages (employer matches). FUTA = 0.6% × first $7,000 (after 5.4% state credit). Additional Medicare = 0.9% withheld on wages > $200,000 (not matched).Example
An employee earns $80,000 in gross wages for the year. Employee FICA = $80,000 × 7.65% = $6,120 withheld from paychecks. Employer matches with another $6,120. Employer-only FUTA (after state credit) = $7,000 × 0.6% = $42. State SUTA at a 2.7% experience rate on a $14,000 state wage base = $378. Total employer payroll tax burden = $6,120 + $42 + $378 = $6,540, or roughly 8.2% on top of the $80,000 gross wage. Combined with the employee's $6,120 contribution, total payroll taxes flowing to government = $12,660.
Why It Matters for Your Business
Payroll taxes are a non-negotiable legal obligation, and failing to deposit them on time triggers the Trust Fund Recovery Penalty — the IRS can pierce the corporate veil and assess 100% of unpaid trust fund taxes personally against any owner, officer, or bookkeeper deemed responsible.
Practical Tips
- •Outsource payroll tax deposits to Gusto, ADP, Paychex, or QuickBooks Payroll — DIY is the single biggest path to Trust Fund Recovery Penalty exposure
- •Confirm your deposit schedule (monthly vs semi-weekly) every November based on your IRS lookback-period determination — using the wrong schedule triggers penalty
- •Never "borrow" trust fund money to fund operations, even briefly — the TFRP applies regardless of intent and survives bankruptcy
- •Verify the current year's Social Security wage base and additional Medicare thresholds with the IRS each January — they change and miscoding causes payroll software errors
Common Questions About Payroll Tax
How is payroll tax calculated?
The formula is: FICA Per Employee = 6.2% (Social Security, up to wage base) + 1.45% (Medicare, all wages) = 7.65% of wages (employer matches). FUTA = 0.6% × first $7,000 (after 5.4% state credit). Additional Medicare = 0.9% withheld on wages > $200,000 (not matched).. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of payroll tax?
An employee earns $80,000 in gross wages for the year. Employee FICA = $80,000 × 7.65% = $6,120 withheld from paychecks. Employer matches with another $6,120. Employer-only FUTA (after state credit) = $7,000 × 0.6% = $42. State SUTA at a 2.7% experience rate on a $14,000 state wage base = $378. Total employer payroll tax burden = $6,120 + $42 + $378 = $6,540, or roughly 8.2% on top of the $80,000 gross wage. Combined with the employee's $6,120 contribution, total payroll taxes flowing to government = $12,660.
Why does payroll tax matter for my business?
Payroll taxes are a non-negotiable legal obligation, and failing to deposit them on time triggers the Trust Fund Recovery Penalty — the IRS can pierce the corporate veil and assess 100% of unpaid trust fund taxes personally against any owner, officer, or bookkeeper deemed responsible.
How does FiscalInsights help with payroll tax?
FiscalInsights tracks payroll tax automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
Related Terms
More Taxes Terms
Tax Deduction
An expense that reduces taxable income.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
Form 1099
IRS forms reporting various types of income other than wages.
Form W-2
Annual statement from employers showing employee wages and taxes withheld.
FICA
Federal Insurance Contributions Act taxes that fund Social Security and Medicare.
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