Payroll taxes are taxes that employers and employees pay every time they run payroll. These taxes include a range of federal, state, and local taxes. However, the bulk of payroll taxes goes toward the federal Social Security and Medicare programs.
The payroll tax rate for Social Security and Medicare is 15.3%. The employer is responsible for half of this—or 7.65%—and the employee is responsible for the other half. Self-employed individuals must pay the entire 15.3%.
What’s Included in Payroll Tax?
Payroll taxes include several different federal, state, and local taxes.
The term “payroll tax” is often used to describe taxes paid under FICA (the Federal Insurance Contributions Act). FICA encompasses taxes for the federal Social Security and Medicare programs.
The Social Security tax rate is currently 6.2% for the employer and 6.2% for the employee. The Medicare tax rate is 1.45% for the employer and 1.45% for the employee. Altogether, those add up to 15.3% of an employee’s base wage rate split evenly between the employer and employee.
High-earning employees may also have to pay additional Medicare tax. Employees who earn more than $200,000 in a year have to pay a tax of 0.9% on wages over that threshold. Employers do not contribute towards additional Medicare taxes.
In addition, employers have to pay federal unemployment tax under the Federal Unemployment Tax Act (FUTA). The unemployment tax rate is 6% on the first $7,000 paid to an employee during a calendar year. Employees do not have to pay federal unemployment taxes.
All states also charge unemployment taxes, although unemployment tax rates vary by state. Only employers pay state unemployment taxes.
Notably, state-level taxes are paid for each employee in the state where the employee is located—rather than where the company is located. This is especially important for businesses that allow remote work. Companies that have employees in multiple states will need to pay unemployment taxes in each of those states.
State and local taxes
As well as unemployment taxes, states may charge additional employer payroll taxes. These are typically charged to fund disability insurance, worker’s compensation insurance, or initiatives such as transit projects.
Currently, New Jersey, New York, California, Hawaii, and Rhode Island are the only states with mandatory payroll taxes for disability insurance. In New Jersey, California, and Rhode Island, employers are responsible for paying disability taxes. In New York and Hawaii, employee wages may be withheld to pay for disability insurance.
Many states also require employers to pay for worker’s compensation insurance. Rates for worker’s compensation insurance vary by state and industry as well as by an employee’s job role and salary.
Depending on where a business is located, employers may also be required to pay local taxes. Local tax rates vary by city and often by industry and company size.
Payroll Tax Rates for the Self-employed
Self-employed individuals must pay both the employer and employee portions of Social Security and Medicare tax. So, their payroll tax rate is the full 15.3%, plus additional Medicare tax if they earn more than $200,000 per year.
Self-employed individuals do not have to pay federal or state unemployment taxes. They are not eligible to claim unemployment benefits. They are also not required to pay for disability insurance or worker’s compensation insurance in any state.
Self-employed individuals may have to pay other state-level payroll taxes and local taxes. However, states and cities typically only charge payroll taxes on businesses with more than a certain number of employees.
Other Payroll Costs
While not taxes, employers and employees will often take money out of payroll for a number of other purposes.
- Health care benefits. Companies with more than 50 employees are required by the Affordable Care Act (ACA) to offer health insurance to employees. Smaller companies may optionally offer health insurance plans. It’s up to employers to determine how much of the premium cost employees should pay. This cost is deducted during payroll.
- Retirement plans. Many companies choose to offer retirement plans such as a 401(k). Employee contributions to a retirement plan are deducted during payroll. Employers may also make matching contributions for employees.
- Additional pay. Reimbursements, stipends, and other forms of additional pay are typically processed during payroll. This is money that an employer pays and the employee receives on their paycheck.
- Income tax withholdings. Employers are required to withhold federal income taxes for employees. Employees can file IRS Form W-4 to tell their employers how much money should be withheld each pay period.
Late Payment Penalties
Payroll taxes must be paid semi-weekly or monthly. Businesses that are late making payments will have to pay a penalty for the unpaid amount. Penalties increase as more time passes:
- 1-5 days late: 2% penalty
- 6-15 days late: 5% penalty
- More than 15 days late: 10% penalty
- More than 10 days after first notice: 15% penalty
The payroll tax rate is 15.3% for federal Social Security and Medicare taxes. This tax is split between the employer and the employee. Self-employed individuals pay the entire 15.3%. Employers also have to pay federal and state unemployment taxes, plus any additional state and local payroll taxes in the places where they have employees.