Payroll taxes are taxes calculated on the wages and salaries a business pays its employees. Some are paid by the employee and withheld from each paycheck; others are paid by the employer on top of wages. In the United States, the main federal payroll taxes are Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA), the federal unemployment tax under FUTA, and federal income tax withholding, with state unemployment taxes and, in many states, state income tax withholding added on. The employer's own share is covered in the entry on employer payroll taxes; this entry looks at payroll taxes as a whole.
Payroll taxes fund social insurance programs such as Social Security, Medicare and unemployment benefits. For accountants they create two kinds of figures: liabilities for amounts withheld from employees, which belong to the government, and expenses for the employer's own share.
Main US payroll taxes
| Tax | Paid by | Rate and base |
|---|---|---|
| Social Security (OASDI) | Employee and employer | 6.2% each, on wages up to the annual wage base ($184,500 for 2026) |
| Medicare | Employee and employer | 1.45% each on all wages; extra 0.9% on employee wages above $200,000 |
| Federal unemployment (FUTA) | Employer only | 6.0% on the first $7,000 per employee, usually reduced to 0.6% by credit for state taxes |
| State unemployment (SUTA) | Employer (employee too in a few states) | Rates and wage bases vary by state and by the employer's claims history |
| Federal income tax withholding | Employee | Based on wages and Form W-4 |
Some states and cities also levy payroll-based taxes for disability insurance, paid family leave or local services.
Worked example
A small business pays one employee $4,000 a month. In January, with all wages below the relevant limits, the employer withholds Social Security of $248 (6.2 percent), Medicare of $58 (1.45 percent) and, say, $420 of federal income tax. The employee's net pay before other deductions is $3,274. The employer's own taxes are:
Here is the month's wages, 0.062 and 0.0145 are the employer's Social Security and Medicare rates, is the net FUTA rate (0.006) and is the state unemployment rate, assumed to be 2.7 percent. The employer's cost is $4,000 times 0.1095, or $438. Once the employee's wages pass $7,000 in the year, FUTA stops, and state unemployment stops once the state wage base is reached. Over a year, net FUTA on this employee is only $42.
Recording and paying payroll taxes
When payroll is recorded, wages expense is debited for gross pay, and withheld amounts are credited to liabilities such as FICA taxes payable and federal income tax withholdings payable. A separate entry debits payroll tax expense for the employer's share and credits FICA, FUTA and SUTA payable. Federal withholding and FICA are deposited electronically on a monthly or semiweekly schedule set out in IRS Publication 15, known as Circular E, and reported quarterly on Form 941. FUTA is reported annually on Form 940, and employees receive Form W-2 each year. Unpaid amounts at period end are current liabilities, and employer taxes on wages earned but not yet paid are included in accrued payroll.
Compliance risks
Withheld income tax and the employee share of FICA are trust fund taxes. If a business fails to pay them over, the Internal Revenue Service can assess the trust fund recovery penalty personally against owners, officers or others responsible for paying them. Late deposits also attract penalties of up to 15 percent plus interest. Other common problems include misclassifying employees as independent contractors, which shifts tax obligations wrongly, and failing to register in states where remote employees work. Payroll taxes also differ from withholding tax on payments such as dividends to foreign investors, which follows separate rules.