Understanding the different types of payroll taxes isn’t just helpful. It’s essential if you want to stay compliant, avoid penalties, and keep your payroll running smoothly. In this article, we’ll break down what payroll taxes are, who pays what, and how to stay ahead of your responsibilities.
What are Payroll Taxes?
Payroll taxes are mandatory taxes employers must calculate, withhold, and pay based on their employees’ wages. These taxes fund key government programs like Social Security, Medicare, and unemployment insurance.
Some payroll taxes are split between employer and employee, while others are paid exclusively by the employer. And yes, it gets more complex if you’re operating across state lines or hiring remote workers.
Payroll tax examples aound the world
Payroll tax obligations differ globally. Here’s a snapshot of common examples from the U.S. and beyond:
In the United States:
- Social Security Tax: Shared between employer and employee
- Medicare Tax: Shared between employer and employee
- Additional Medicare Tax: Paid by employees earning over $200,000
- FUTA: Paid by employers to fund unemployment
- SUTA: State-level unemployment insurance
- Income Tax Withholding: Federal and often state/local
- Workers’ Compensation: Mandatory in most states
In the United Kingdom:
- Pay As You Earn (PAYE): Income tax withheld at source from employee wages
- National Insurance Contributions (NICs): Paid by both employer and employee to fund healthcare, pensions, and other benefits
In the Netherlands:
- Wage Tax (Loonheffing): Withheld by the employer to cover income tax and national insurance
- Employee Insurance Contributions: Cover unemployment, disability, and sickness benefits
In Germany:
- Income Tax (Lohnsteuer): Withheld at source
- Solidarity Surcharge and Church Tax (kirchensteuer): Additional regional or religious levies
- Social Insurance Contributions: Cover pension, unemployment, health, nursing care, and accident insurance
Each country enforces its own rates, caps, and deadlines. If you manage an international workforce, understanding these nuances or working with a global payroll integration partner is critical.
The 4 core types of payroll taxes USA
Here’s a quick breakdown of the main types you need to know:
1. FICA Taxes (Social Security & Medicare)
FICA stands for the Federal Insurance Contributions Act. This tax is shared by both employer and employee:
- Social Security: 6.2% each (12.4% total), up to the wage base limit
- Medicare: 1.45% each (2.9% total), with no cap
- Additional Medicare Tax: 0.9% withheld from employees earning over $200,000 (employers don’t match this)
These taxes help fund retirement, disability, and medical benefits.
2. Federal Income Tax Withholding
Employers must withhold federal income tax from employee paychecks based on IRS guidelines and the employee’s W-4 form. Unlike FICA, this one is employee-only.
3. Federal Unemployment Tax (FUTA)
This one’s employer-only:
- Standard rate: 6% on the first $7,000 of wages per employee
- Most employers qualify for a credit, lowering this to 0.6%
FUTA funds unemployment benefits across the U.S.
4. State and Local Payroll Taxes
Depending on where your employees live and work, you may be responsible for additional payroll taxes:
- State Unemployment Tax (SUTA): Usually employer-paid, though some states (like NJ and PA) require employee contributions too
- State/Local Income Tax: Required in most states, and sometimes even by cities (e.g., NYC)
- Other Levies: Think paid family leave, disability insurance, or transit taxes in certain regions
Additional Employer Payroll Obligations
Besides the taxes listed above, employers often need to handle:
- Wage garnishments (e.g., child support or tax liens)
- Benefit deductions (like retirement plans or healthcare premiums)
- Workers’ compensation insurance premiums
These aren’t technically payroll taxes, but they’re commonly managed during payroll processing and must be calculated correctly.
Self-Employment Tax (Bonus Tip!)
If you’re self-employed, you’re on the hook for the full FICA amount 14.13% total. This is called SECA (Self-Employed Contributions Act) tax, and it covers both the employer and employee share.
Who Pays What? A Quick Reference
| Tax Type | Employer Pays | Employee Pays |
|---|---|---|
| Social Security | ✅ (6.2%) | ✅ (6.2%) |
| Medicare | ✅ (1.45%) | ✅ (1.45%) |
| Additional Medicare | ❌ | ✅ (0.9% over $200k) |
| Federal Income Tax | ❌ | ✅ |
| FUTA | ✅ | ❌ |
| SUTA | ✅ (mostly) | ✅ (in some states) |
| State/Local Income Tax | ❌ | ✅ |
How to calculate payroll taxes
To calculate payroll taxes accurately:
1. Gather employee information: W-4 forms, benefits selections, and work location
2. Apply federal, state, and local tax rules: Use current IRS publications and local guidance
3. Use payroll software or integration tools: Automate calculations and tax filings to reduce errors
4. Double-check your math: Especially when calculating wages near income or benefit limits
Common Payroll Tax Mistakes to Avoid
- Misclassifying employees as contractors
- Missing deadlines for deposits or returns
- Incorrect tax rates or outdated software
- Not tracking local tax obligations for remote workers
Why Payroll Taxes Matter
Besides staying legal, getting payroll taxes right protects your business and builds trust with your team. Here’s why:
- Avoid penalties: Late filings or missed payments can mean hefty fines
- Stay compliant: Local and federal rules change often
- Employee confidence: No one likes surprises in their paycheck
How to Reduce Your Payroll Tax Burden
Looking to cut back on payroll tax costs without cutting corners? Here are some strategic steps:
- Pay on time: File and deposit all payroll taxes promptly. Late payments often trigger penalties and interest.
- File returns: even if you owe nothing: Some jurisdictions charge fees or fines just for missing filings.
- Document all expenses: Track operational costs like wages, benefits, office equipment, and supplies. Many are tax-deductible.
- Audit your payroll deductions: Regularly review what you’re withholding from employee paychecks to ensure accuracy and compliance.
- Leverage available tax credits: Programs like the Work Opportunity Tax Credit (WOTC) or R&D credits can offset tax liabilities.
- Offer pre-tax benefits: Health insurance, retirement plans (like 401(k)s), and transportation benefits can reduce taxable income.
- Hire a specialist: A tax professional or accounting firm can help you optimize your payroll and stay audit-ready.
Even simple changes like automating calculations or restructuring benefits can lead to big savings over time.
Simplify Payroll Tax Management
Tracking every deduction manually? That’s a recipe for errors and headaches. BrynQ integrates your payroll with HR and, so you never miss a tax, deadline, or detail.
Want to make payroll effortless? Request a demo to see how BrynQ keeps your payroll precise, compliant, and stress-free.
Not exactly. Federal income tax is a type of employment tax, but not a payroll tax in the strict sense. Payroll tax refers to Social Security, Medicare, and unemployment-related taxes.
No. Employers match Social Security and Medicare (FICA), but not federal income tax or the Additional Medicare tax.
You must withhold federal taxes no matter where employees live, but state/local taxes depend on their home jurisdiction. Some states require you to register and remit taxes even if your business isn’t physically there.
Yes. These forms of compensation are subject to the same payroll tax rules as regular wages.
The IRS can impose significant penalties and even criminal charges for willful non-payment. You may also be personally liable under the Trust Fund Recovery Penalty.
At least 4 years after the due date of the return or payment, per IRS guidelines.