Payroll taxes are the taxes you withhold from employee paychecks, plus the taxes you owe as the employer on top of those wages. Getting them right means calculating each tax correctly, depositing it on time and reporting it on the right forms. This guide explains the basics in plain English so you can see how the pieces fit together before you dive into the details of each one.
The taxes involved
Most payroll taxes fall into two groups. Some are taken out of the employee's pay and sent to the government. Others are paid by the employer from its own funds.
| Tax | Who pays | 2026 rate and limit |
|---|---|---|
| Federal income tax withholding | Employee (withheld by employer) | Based on the employee's Form W-4 and IRS withholding tables |
| Social Security | Employee and employer | 6.2% each on wages up to $184,500 |
| Medicare | Employee and employer | 1.45% each, no wage limit |
| Additional Medicare Tax | Employee only | 0.9% on wages over $200,000 in the year |
| Federal unemployment tax (FUTA) | Employer only | 6.0% on the first $7,000 per employee, usually reduced to 0.6% by a state tax credit |
| State and local taxes | Varies | Set by each state, county and city |
Social Security and Medicare together are often called FICA taxes. The Additional Medicare Tax starts in the pay period when an employee's wages for the year pass $200,000, and the employer does not match it. We cover it in more detail in our Additional Medicare Tax guide.
The FUTA credit of up to 5.4% depends on paying your state unemployment tax in full and on time. In a few states with unpaid federal unemployment loans, the credit is reduced and the FUTA bill goes up. See our Form 940 and FUTA guide.
What an employer actually does
Running payroll is a cycle, not a single task.
- Get a federal employer identification number (EIN) and register with your state agencies.
- Decide whether each worker is an employee or an independent contractor.
- Collect a Form W-4 and a Form I-9 from each new employee, and report the hire to the state. See new hire reporting.
- Withhold the right amounts each pay period.
- Deposit the taxes on your assigned schedule, electronically.
- File Form 941 each quarter, Form 940 each year, and Forms W-2 and W-3 after year-end.
- File state and local returns and pay state unemployment tax.
- Keep records for at least 4 years.
Example: one paycheck
Example, using round numbers. An employee earns $2,000 in a pay period, and $200 of federal income tax is withheld based on her W-4.
- Employee Social Security: $2,000 x 6.2% = $124.00
- Employee Medicare: $2,000 x 1.45% = $29.00
- The employer owes the same $124.00 and $29.00 as its share.
- The deposit for this paycheck is $200 (income tax) + $153 (employee FICA) + $153 (employer FICA) = $506.
Her take-home pay before any state tax is $2,000 - $200 - $153 = $1,647. Your cost for the paycheck is $2,000 + $153 = $2,153, plus unemployment taxes and any state or local taxes.
Why withheld taxes are treated so seriously
The income tax and the employee's share of FICA that you withhold are called trust fund taxes. You are holding that money on behalf of the government. If it is not deposited, the IRS can assess the trust fund recovery penalty against the individuals who were responsible for the payments, in addition to business-level penalties. Our guide to payroll tax penalties and relief explains how that works.
Common mistakes
- Treating workers as contractors when the facts point to employee status.
- Using stale Forms W-4, or none at all.
- Leaving out taxable fringe benefits, such as personal use of a company car. See fringe benefits and taxable wages.
- Missing state and city obligations when an employee lives or works somewhere new. See multi-state payroll.
- Paying an S corporation owner nothing. See payroll for S corporation owners.
- Using a payroll vendor and assuming the legal responsibility moves with it. The employer generally stays responsible.
How we can help
We run payroll for businesses at the federal, state, county and city levels, and we can review an existing setup for missed registrations, wrong tax rates or late deposits. Learn more about our payroll services, or see how payroll fits with bookkeeping and business tax preparation.
This page is general information, not advice for your situation. A qualified professional can look at your facts.
Frequently asked questions
What payroll taxes does an employer pay in 2026?
The employer pays its half of Social Security (6.2%) and Medicare (1.45%), federal unemployment tax, state unemployment tax, and any state or local payroll taxes that apply. The employer also withholds and sends in the employee's income tax, Social Security and Medicare.
Is the Social Security wage base the same for every employee?
Yes. For 2026 the tax applies to the first $184,500 of each employee's wages from you. If an employee has two employers, each one withholds up to that limit, and the employee sorts out any excess on the personal return.
Do I match the Additional Medicare Tax?
No. The 0.9% Additional Medicare Tax applies to the employee only. You begin withholding it in the pay period when the employee's wages for the year go over $200,000.
How long do I need to keep payroll records?
The IRS says to keep employment tax records for at least 4 years. Your state may require longer, and some other records, such as Form I-9, follow separate rules.
Official sources
- IRS: Publication 15 (Circular E), Employer's Tax Guide
- IRS: Understanding employment taxes
- IRS: Topic no. 759, Form 940 and FUTA
- IRS: Questions and answers for the Additional Medicare Tax
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.