Kathryn McCawley
Jul 8, 2021

What are Payroll Taxes? An Employer's Guide

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The big question that haunts employees and employers alike: exactly what are payroll taxes? Every year, businesses and individuals file their taxes to the U.S. government, (unless you’re partaking in tax evasion, which, in that case, you can stop reading here. Or... better yet, don’t do that!) But for most of us, taxes are a yearly obligation that can get really confusing really fast. Especially when it comes to payroll taxes.

Americans contribute payroll taxes to the U.S. government, but it’s actually the responsibility of the employer to withhold these funds and ensure they’re submitted to the IRS. So if you’re handing out the paychecks, it's probably a good idea to know what you should be withholding and submitting.

To avoid getting on the wrong side of the Internal Revenue Service, why don't we jump right in.

So, what are payroll taxes?

In general terms, payroll taxes are taxes determined from an employee’s wage, salary, and tips. They are paid by both the employee and employer, but it is the employer who automatically deducts these from an employee’s wages and pays them to the government.

Payroll taxes that an employer collects always includes a federal tax. However, most states also have a state payroll tax (similar to state and local income taxes) as well as SUTA (the State Unemployment Tax Act), so be sure to check if that will be the case for your state.

As for the purpose of payroll taxes? They are key components of the United States’ social insurance program.

Federally, this includes:

  • Social Security
  • Medicare
  • Retirement
  • Disability
  • Unemployment (FUTA)

When reading up on payroll taxes, you will often hear the term FICA, also known as the Federal Insurance Contributions Act

FICA consists of Social Security and Medicare taxes, which are funded through payroll. Their impact is significant.

A large part of government revenue comes from income tax, but payroll contributes as much as a third of yearly government revenue.

What are Payroll Taxes - Government Tax Revenue Sources - Wrapbook
Breakdown of government tax revenue sources - Peter G. Peterson Foundation

And speaking of income tax...

Payroll tax vs income tax: how do they differ?

Employers play a role in managing both income and payroll taxes. To understand who pays payroll taxes and how employers withhold and manage employee’s taxes, it’s integral to know the differences between them.

What are Payroll Taxes - Payroll tax vs income tax - Infographic - Wrapbook
Payroll tax vs. income tax.

One of the key differences between payroll and income is how those funds are used. While payroll taxes your employer collects contribute to social insurance programs, income taxes contribute to larger government funding (on the federal and state level). In addition to federal income, there is also state and local income tax.

With payroll tax (referring to FICA or SS+medicare), the employer pays half of the tax (by deducting from the employee’s wages) and then takes out the employee’s half of the tax. They then send this all to the IRS.

With income tax, the employee pays the entirety of the tax based on their income. The employer does not pay anything, but they are instead responsible for withholding. 

Another key difference between payroll and income tax is how their rate is applied to wages and salaries.

Regressive follows a flat rate regardless of your income, while progressive adjusts according to your income. But we’ll get more into that shortly.

Withholding vs payroll taxes

As the employer, you manage the distribution of your employees' taxes. It’s important to note that there is a difference between money withheld for income tax and remittance for payroll taxes.

Unlike payroll taxes where the employer pays half of the tax, income taxes are withheld by employers according to their employee’s W-4. Their tax withholdings will be impacted by wages, pay frequency, and W-4 selection.

What are Payroll Taxes - Withholdings and W-4s - Wrapbook
W-4 form outlining employee withholdings for income tax.

From those factors, a progressive tax rate is determined. Employers withhold that amount from their paychecks and pay it to the government.

Progressive rate vs regressive flat rate

One of the key differences between income and payroll taxes is how they are determined. 

Payroll tax is considered a fixed tax. 

In total, 15.3 percent of an employee’s income is paid to the US government. Employers pay 7.56 percent of employee salary from their own revenue, while the other half is directly taken from and noted on an employee’s pay stubs.

What are Payroll Taxes - Regressive and Progressive - Wrapbook
Breakdown of income and payroll tax based on income - from Tax Foundation.

Payroll is a regressive tax as it is applied uniformly. Both employees and employers pay 6.2% until a yearly cap is met. So with a regressive tax, lower-income earners will contribute more of their yearly income than high-income earners.

Example of payroll tax 

This is all abstract, so let’s break this down in an actual tax situation you may find yourself in as an employer.

Say you’re a producer who has just hired three workers. Two of them are full-time employees while the third is a contractor. 

For the full-time employees, you are accountable for their W-4 withholdings, FICA payroll taxes, and state payroll taxes (including SUTA). For each paycheck, you will be responsible for paying half of Social Security and Medicare FICA taxes, as well as the full rate of FUTA. 

For contractors, as they are not employees, you will not be responsible for their FICA payroll taxes. Instead, you will file contractors pay through 1099 forms. 

Though if you're working in California, be sure you've classified your workers correctly before you file anything.

There's obviously a ton of moving parts here. And no one person can possibly be an expert at everything.

And they shouldn’t have to be.

Wrapbook is up to date on all labor, union, and guild rules so you can focus on what matters. When processing payroll, just select your worker, and our software will process all the needed tax filings. 

What are Payroll Taxes - Payroll Software - Wrapbook
Use software to easily calculate payroll taxes for all of your employees.

Records are easily kept and organized to make communicating with your accountant and filing your taxes all the more simple.

For more info on making this process a bit easier, reach out to one of our payroll experts, anytime.

Who pays payroll taxes?

As for who pays payroll taxes, unlike employee-paid income tax, what is included in payroll taxes are contributions from both the employee and employer.

For payroll, 15.3 percent of an employee’s income goes toward payroll taxes. Half of that amount (7.56) is held from each employee’s paycheck, which accounts for the employee payment. The other percent is automatically deducted by the employer and paid to the IRS.

What are Payroll Taxes - Who Pays Payroll Taxes - Wrapbook
Breakdown of employee and employer tax contributions - What are payroll taxes?

Social security and Medicare are broken down so that employee and employer pay for half of them. However, Federal Unemployment Tax (FUTA) is the sole responsibility of the employer.

What are payroll taxes used for?

As for why we pay payroll taxes...well, these taxes fund foundational social insurance programs like....

Social Security

Social security, officially titled Old-Age, Survivors, and Disability Insurance (OASDI), is the federal agency most commonly known for its retirement benefits. Workers are eligible for retirement benefits’ replaced income once they reach 62 and have contributed to Social Security for ten or more years. 

However, social security has several insurance programs, including: 

  • Retirement Benefits
  • Disability Benefits
  • Survivors Benefits

A quick history of why social security was created...

Payroll taxes provide the greatest contribution toward social security. Payroll draws 12.4 percent of income for social security, 6.2 percent withheld from employee paychecks and 6.2 percent contributed by employers. But once they reach above a certain wage base, neither the employer nor the employee need to pay for social security. 

Medicare

Medicare is the health insurance available for people over the age of 65 and others with qualifying disabilities. 

Medicare FICA taxes equate to 2.9 percent of employee income. Employers will pay 1.45 percent and employees the same amount.

FUTA

Federal Unemployment Tax Act (FUTA) provides unemployment for individuals who have lost their jobs. Unlike Medicare and Social Security, employees do not contribute to FUTA. Employers are solely responsible for FUTA payments.

FUTA draws from 6 percent of employee earnings but similarly has a wage base, after which point, employers are not responsible for taxing. 

State payroll taxes and SUTA 

Many states have their own payroll taxes which contribute to state infrastructure and unemployment. 

SUTA (State Unemployment Tax Act) is among the state-by-state payroll taxes. These also cover unemployment benefits to displaced workers. The rates on SUTA will similarly vary state-by-state.

Even if your state does not have payroll taxes, be sure to check the residence of your off-site employees. If they reside in states that do have payroll taxes, you will need to pay them. 

Where do payroll taxes go? 

For most businesses, you’ll be submitting your taxes in four installments. 

Seems like a chore? With all the requirements of each of these taxes (federal, state, and local), it will actually keep you on track and likely soften any missteps you might have at the end of the year.

Federal payroll taxes are deposited along with the federal income tax. If you are a business who pays payroll tax, be sure to submit the employee and employer portions of the tax. 

What about income tax? 

Income tax is an umbrella term that describes federal, state, and local taxes. With federal income, you’ll deposit it along with payroll taxes. State and local taxes contribute to more localized funds, so that will be a separate filing and deposit.

Calculating payroll taxes

What is included in payroll taxes and what you submit to the government will be a contribution by both you and your employee. Calculating payroll taxes breaks down to what you as the employer pay from your revenue and what you deduct from your employees’ pay stubs. 

For both Medicare and Social Security, half of those taxes will be paid by you and the other half paid by the employee. For FUTA, you will be solely responsible for the payroll tax.

For each state, the payroll tax and how it is calculated varies. Some states have a fixed payroll tax rate, like federal payroll, and some have progressive rates, like income tax. For what payroll tax includes on a state-by-state level, be sure to stay on top of your local taxes and follow appropriate protocols.

While the taxes you pay on your employees are standard amounts, dependent upon the locality and state in which you’re working, you still can estimate how much tax you’ll have to pay in a given payroll period. 

Generally, you should expect to pay an additional 18-22% of your gross wages in employer payroll taxes amongst local, state, and federal taxes.

For more insight here, estimate your labor costs with Wrapbook’s payroll calculator.

Below is an example of variation of state payroll tax rates.

With payroll taxes, Medicare, Social Security, and FUTA all have wage bases that once an employee’s salary surpasses, percentages decrease and, in some cases, payments need not be made at all.

Wrapping up

As an employer, you play a key role in managing your employees' taxes, so being in the know is paramount. Knowing the basics is obviously necessary but knowing how to stay organized to continue to file correctly year after year, is a must.

Hopefully you understand the world of payroll taxes a bit better, but again, don't feel you need to be an expert. People are always here to help and there is plenty of software out there to ensure compliance and accuracy every step of the way. Reach out to a team member or payroll expert anytime to learn more.

Disclaimer

At Wrapbook, we're all about providing the very best free resources to producers and their crews. However, this post is not a substitute for professional legal advice. Answers do not create a company-client relationship, nor is it a solicitation to offer legal advice. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your decisions or rights.

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About the Author

Kathryn McCawley

Kathryn is a Los Angeles-based artist-designer passionate about everything entertainment. As both an illustrator and writer, she is interested in how the two worlds meet through animation. You can frequently find her either at your local plant shop or zipping around on roller skates.

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