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Small business owners have a lot to keep track of, and payroll taxes are critical. Fortunately, Square Payroll may help ease this process by calculating and depositing your payroll taxes and filing the appropriate tax filings with the federal and state agencies.
To ensure your payroll stays in compliance with federal and state payroll regulations, keep reading to learn how payroll taxes work and for additional resources explaining more about payroll taxes and calculating an employee’s paycheck.
What are payroll taxes?
The federal government levies payroll taxes on earned wages and uses most of the revenue to fund Social Security and Medicare. While payroll involves multiple types of taxes, only Social Security and Medicare are officially payroll taxes.
Federal income taxes, a different kind of tax, pay for government services, including defense and social services. State income taxes fund a variety of state programs, potentially including education, health care, transportation, state police, and parks.
Types of taxes impacting payroll
Employee-paid taxes usually consist of:
- Federal income tax
- State income tax
- Social Security
- Medicare
Employer-paid taxes typically consist of:
- Federal unemployment tax
- State unemployment tax
- Social Security
- Medicare
The amounts of these payroll taxes and what they pay for are highlighted in the table below.
Types of payroll taxes
| Employer Pays | Employee Pays | Total | Cap? | What They Pay For | |
|---|---|---|---|---|---|
| Social Security | 6.2% | 6.2% | 12.4% | $137,700 | Per dollar, 85 cents goes to a trust fund that pays monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died. The other 15 cents goes to a trust fund that pays benefits to people with disabilities and their families. |
| Medicare | 1.45% | 1.45% | 2.9% | No Limit^ | This tax goes to a trust fund that pays for some of the costs of hospital and related care for all Medicare beneficiaries. |
| State Unemployment | Variable | None^^ | Variable | Variable | This tax, paid to state workforce agencies, is typically used to pay unemployment benefits to state workers. State law determines individual state unemployment insurance tax rates. |
| Federal Unemployment | 6.0%^^^ | None | 6.0% | $7,000 | Unemployment tax, paid for by employers, covers the costs of administering unemployment insurance and job service programs in all states. |
^ Additional Medicare taxes apply to individual earners with an income over $200,000 or married households earning more than $250,000. The additional tax is 0.9%.
^^ Some states may require or allow employers to withhold a portion of state UI taxes from employee wages.
^^^ Employers can take a credit of up to 5.4% related to federal unemployment taxes of taxable income if they pay state unemployment taxes. This credit is lower in “Credit Reduction States,” where the state has not repaid money it borrowed from the federal government to pay unemployment benefits.
How to calculate payroll tax
An employee’s paycheck generally consists of federal income tax, Social Security, and Medicare. If you are located in a state with state income tax withholding, you will need to withhold state income tax as well.
Social Security is calculated at 6.2% of gross pay, and it’s capped once the employee earns $168,600 in 2024. This means the amount of Social Security tax you will pay in one year is $10,453.20. Social Security taxes are matched by the employer, for a total of 12.4%.
Medicare has no cap and is calculated at 1.45% of an employee’s gross pay. The employer matches Medicare tax for a total of 2.9%. If an employee earns more than $200,000 in a single year, employers must withhold an additional 0.9%. This 0.9% is only paid by the employee and not the employer.
Federal and state income taxes are a bit more complex. Federal income tax is determined by Form W-4 by the employee, indicating their filing status as well as their number of exemptions. Employers must calculate taxes according to IRS Publication 15-T. Note that this tax table is updated annually by the IRS.
For state income tax withholding, there is a similar table produced annually by each state determining how much state income tax to withhold from each employee’s paycheck. For example, if your employees work in California, you can follow the directions on the California withholding schedule to determine how much state income tax to withhold from your employee’s paycheck.
Payroll tax penalties
Payroll taxes are due to the government on a specific schedule, depending on the size of your business. When the taxes are not paid, are paid late, or are paid but don’t follow the correct guidelines, employers can face severe penalties and accrue interest.
By hiring a payroll service, you won’t need to worry about submission guidelines, the accuracy of payment, or getting your payroll taxes paid on time. It will take care of it for you.
The three components that make up a correct deposit are: (1) the deposit is made timely, (2) the deposit is in the correct amount, and (3) the deposit is made in the correct manner. A failure to comply with any of these components will subject the deposit to the FTD (Failure to Deposit) penalty. The percentage rate charged depends on the number of calendar days a deposit is late or whether there is a direct payment.
Per IRC 6656(b)(1), there is a time-sensitive penalty system for late deposits. The penalty rate assessed depends on the number of calendar days a deposit is late, starting from the due date of the deposit. For liability amounts not properly or timely deposited, the penalty rates are as follows.
- 2% for deposits 15 days late
- 5% for deposits 6–15 days late
- 10% for deposits made more than 15 days late; this also applies to amounts paid within 10 days of the date of the first notice requesting payment for the tax due.
- 10% for required deposits not paid by EFT (electronic funds transfer)
- 15% (a 5% addition to the 10% for late payment) for all amounts still unpaid more than 10 days after the date of the first notice requesting payment of the tax due, or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier.
Learn more about penalties and common payroll mistakes.
Payroll taxes don’t have to be a headache.
Calculating payroll taxes by hand is a huge chore, which is why savvy businesses use a payroll service to handle payroll and all required taxes. Square Payroll is an all-in-one payroll solution that includes calculations, withholdings, and all related paperwork. With Square Payroll, you can save time and focus on what matters most: running your business.
There’s a lot you should be aware of when it comes to payroll taxes. The IRS provides guidance online, but here are some frequently asked questions.
1. How can I pay payroll taxes online?
After collecting federal withholding tax from employees, an employer can pay them online using the Electronic Federal Tax Payment System (EFTPS). State agencies will generally have their own electronic or manual processes to submit state payroll taxes.
Whether you’re paying payroll taxes in Texas or New York, you must also submit your federal tax filings to the IRS, state payroll tax filings to the related state agency, and Form W-2s to the Social Security Administration.
2. Generally speaking, what are the payroll tax rates?
There are several common types of taxes you’ll notice on your pay stub: federal income tax, Social Security tax, Medicare tax, and a state income tax (note that not all states have an income tax; some states may levy additional taxes, and some employees might be excluded from certain taxes). Payroll taxes are the Social Security and Medicare tax portions. Depending on where you live and work, local taxes may also apply.
Both the IRS and state tax agencies publish annual tables to determine the amount of tax to be withheld from each paycheck, depending on the employee’s gross wages, filing status, number of withholding allowances (exemptions), and pay frequency. Social Security and Medicare taxes put together are called “FICA” (Federal Insurance Contributions Act) taxes and have specific rates and thresholds.
For 2024, the Social Security tax rate is 6.2% on the first $137,700 of wages paid. The Medicare tax rate is 1.45% on the first $200,000 of wages. If you earn more than $200,000 per year as an individual or $250,000 when married filing jointly, you’ll have to pay an additional 0.9% for qualifying income above that threshold.
3. Which states do not have an income tax?
There are currently nine states in the U.S. that do not levy an income tax on wages:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
New Hampshire and Tennessee don’t tax wages, but they do tax some dividends and interest income.
Please note that this is only intended as an overview of how payroll taxes generally work. It is not tax or legal advice that you can rely upon for your business. For guidance or advice specific to your business, you should consult with a tax or legal professional.
