Payroll tax: What employers need to know and how to comply

Published Monday 22 December 2025

Table of contents

• What are payroll taxes?
• Who pays payroll taxes?
• Federal versus state payroll taxes
• What are the largest payroll taxes?
• Social Security tax rate and deductions
• Medicare tax rate and deductions
• Federal unemployment tax rate and deductions
• Federal income tax deductions
• Current payroll tax rates for 2025
• How to calculate payroll taxes
• Employer payroll tax responsibilities
• Payroll tax deadlines and compliance
• Staying on top of payroll taxes
• Streamline payroll taxes with Xero
• FAQs on payroll taxes

Key takeaways

• Calculate payroll taxes by applying specific rates to gross wages: 6.2% each for employer and employee Social Security tax (up to $176,100 wage cap), 1.45% each for Medicare tax, and employer-only FUTA tax up to 6% on first $7,000 of annual earnings per employee.

• Implement automated payroll software to handle complex tax calculations and reduce errors, as manual spreadsheet calculations become time-consuming and error-prone with multiple employees and changing tax rates.

• Meet federal payroll tax deposit deadlines on either a monthly or semiweekly schedule depending on your tax liability, and file quarterly Form 941 reports to avoid penalties that have left over 1.6 million businesses owing $58 billion in unpaid taxes.

• Budget for employer-paid payroll taxes as additional costs beyond employee wages, including your matching portions of Social Security and Medicare taxes plus the full FUTA tax burden that significantly impacts hiring expenses.

What are payroll taxes?

Payroll taxes are mandatory tax payments employers must make when paying employees to fund government programs like Social Security, Medicare, and unemployment insurance. These taxes are split between employers and employees - some come directly from employee paychecks, while others are paid entirely by the employer.

Who pays payroll taxes?

Payroll taxes are a shared responsibility. Both you (the employer) and your employee contribute. Certain taxes, like Social Security and Medicare, are split between both parties. Other taxes, like federal unemployment tax, are paid entirely by the employer. Understanding this split is key to managing your payroll budget and staying compliant.

Federal versus state payroll taxes

Federal payroll taxes apply uniformly to all US businesses, while state payroll taxes vary by location. Here's what you need to know:

• Federal taxes: Same rates and requirements nationwide
• State taxes: Vary by your business location and where employees live
• Action steps: Calculate federal taxes first, then check state requirements for both your business location and employee locations
• Expert help: Consider consulting a payroll professional for multi-state compliance

What are the largest payroll taxes?

The four federal payroll taxes every employer must handle are:

• Social Security tax: 12.4% total (split between employer and employee)
• Medicare tax: 2.9% total (split between employer and employee)
• Federal unemployment tax (FUTA): Paid entirely by employer
• Federal income tax: Withheld from employee wages

State requirements: Most states also impose their own income and unemployment taxes. Check with your state tax agency for specific requirements - compliance is mandatory by law.

Social Security tax rate and deductions

Social Security tax breakdown:

• Total rate: 12.4% of employee earnings
• Employee portion: 6.2% (deducted from paycheck)
• Employer portion: 6.2% (additional business cost)
• Wage limit: Applied only up to the annual IRS wage cap; according to the IRS, for 2025, this base limit is $176,100.

Medicare tax rate and deductions

Medicare tax breakdown:

• Standard rate: 2.9% of employee earnings
• Employee portion: 1.45% (deducted from paycheck)
• Employer portion: 1.45% (additional business cost)
• High earner surcharge: The IRS requires employers to withhold an Additional Medicare Tax of 0.9% on an employee's wages paid in excess of $200,000 annually (employee pays this extra amount, not employer).

Federal unemployment tax rate and deductions

Federal unemployment tax (FUTA) breakdown:

• Standard rate: Up to 6% on first $7,000 of each employee's annual earnings
• Who pays: Employer only (no employee deduction)
• Rate reduction: Can drop to as low as 0.6% when you pay state unemployment taxes on time
• Potential savings: Timely state payments can reduce your FUTA rate by up to 5.4%

Federal income tax deductions

Federal income tax is the most complex payroll tax to manage:

• Who pays: Entirely deducted from employee wages (no employer portion)
• Variable rates: Amount depends on the employee's income level and Form W-4 withholding selections
• Employer responsibility: You must calculate and withhold the correct amount based on current tax tables
• Complexity factor: Unlike fixed-rate taxes (Social Security, Medicare), income tax requires ongoing calculation adjustments

Current payroll tax rates for 2025

Tax rates and wage limits can change each year. For 2025, it's important to use the correct figures for Social Security, Medicare, and FUTA taxes to ensure accurate calculations. Always refer to the latest information from the IRS and your state tax agencies to stay compliant. Using up-to-date payroll software can help automate these calculations for you.

How to calculate payroll taxes

How to calculate payroll taxes To calculate payroll taxes, follow these steps:

1. Apply the current tax rates to your employees’ gross wages
2. For Social Security and Medicare, work out both the employee’s share to withhold and your matching employer share
3. For federal unemployment tax (FUTA), apply the rate to the first portion of each employee’s annual wages
4. Factor in your state’s unemployment and income tax withholding rules

Employer payroll tax responsibilities

Some payroll taxes come out of your expense account rather than the employee’s salary or wages. These are the federal employer payroll taxes:

• Social security (half is paid by the employer)
• Medicare (half is paid by the employer)
• Unemployment (all of this tax is paid by the employer)

Keep all of the employer payroll taxes in mind when budgeting to hire people, as they are additional costs over and above salary and wages. For some sectors, this is a significant challenge. For example, the construction industry had the highest amount of unpaid payroll taxes, totaling $8.6 billion in a Government Accountability Office (GAO) report.

Payroll tax deadlines and compliance

Meeting payroll tax deadlines helps you avoid penalties and long-term issues. One analysis found that the number of businesses with more than 20 quarters of tax debt nearly doubled over a decade. You'll need to deposit federal taxes on a monthly or semiweekly schedule, depending on your tax liability.

Under the semiweekly deposit schedule, taxes for payments made Wednesday through Friday are due by the following Wednesday. You'll also file quarterly reports, like Form 941, and an annual report for federal unemployment tax, Form 940. State deadlines may vary, so check with your local agencies.

Staying on top of payroll taxes

As your business grows, payroll taxes can get more complex.

Common variables that affect calculations include:

• Employee marital status changes
• Fluctuating earnings periods
• Income tax bracket adjustments
• Updated withholding preferences

Spreadsheets have some limitations:

• Income tax rates change with earnings levels
• Manual calculations increase error risk
• Time-consuming for multiple employees

Payroll software offers several benefits:

• Automated calculations: Handles complex tax formulas automatically
• Tax filing integration: Auto-fills returns and enables online filing
• Accuracy assurance: Reduces calculation errors and compliance risks
• Time savings: Eliminates manual payroll tax math

Whatever system you use, make sure you update employee payroll records regularly. You can also encourage employees to tell you about important changes that affect their deductions. Ask them each year if anything on their Form W-4 or state withholding forms has changed. And always consult with your accountant, bookkeeper or payroll professional if you need help.

Streamline payroll taxes with Xero

You can manage payroll taxes smoothly with the right tools. Xero simplifies the process by automating calculations, helping you stay on top of deadlines, and making compliance easier. With real-time insights into your payroll expenses, you can run your business with confidence, not your books. Ready to make payroll easy? Get one month free and see how Xero can help.

FAQs on payroll taxes

Still have questions? Here are answers to some common queries about payroll taxes.

What is the payroll tax rate in the US?

The federal payroll tax rate is a combination of taxes. For 2025, employees and employers each pay 6.2% for Social Security (on earnings up to the wage limit) and 1.45% for Medicare. This totals 7.65% for each party. Employers also pay federal unemployment (FUTA) tax.

How is payroll tax calculated?

Payroll tax is calculated by applying the specific tax rate to an employee's gross wages for the pay period. For example, you multiply an employee's wages by 1.45% to find the Medicare tax amount. The process is repeated for each applicable federal and state tax.

When are payroll taxes due?

Payroll tax deposit deadlines are typically either monthly or semi-weekly, based on your total tax liability reported in a lookback period. Reporting forms, like Form 941, are generally due quarterly. It's important to check the specific IRS and state schedules for your business.

Do all states have payroll taxes?

Nearly all states have a state unemployment tax (SUTA). Many states also have a state income tax that you must withhold from employee wages. A few states have no state income tax, which simplifies the process. Always check the requirements for the states where your business operates and your employees live.