Payroll Taxes: The Employer’s Guide

Nothing is certain in life except death and taxes. And as an employer, payroll taxes are your inevitable responsibility. From federal and state withholdings to local taxes and unemployment contributions, understanding your tax obligations ensures compliance and helps avoid costly penalties. 

In this guide, we share everything you need to know about payroll taxes — from the basics of what they are and how they’re calculated to your specific responsibilities as an employer.

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What Are Payroll Taxes?

Payroll taxes are required deductions from employee paychecks, calculated based on their earnings. Funded by employees, employers, or both, these taxes help pay for essential government-sponsored social programs, including:

• Social Security, which provides retirement, disability, and survivor benefits
• Medicare, which helps fund healthcare for individuals aged 65 and older and disability insurance for certain younger individuals
• Unemployment insurance, which temporarily supports eligible individuals who lose their jobs

All full- and part-time employees must pay payroll taxes, which your business is responsible for withholding. However, independent contractors and freelancers handle their own self-employment taxes, so your business isn't required to deduct taxes from their pay.

Types of Payroll Taxes

Payroll taxes fall into three main categories: federal, state, and local taxes. Below is a breakdown of each.

Federal Payroll Taxes

1. Federal Income Tax Withholding

Federal income tax is paid entirely by employees, and the amount withheld depends on their total earnings, filing status, deductions, and more. To ensure accurate withholding, use each employee’s Form W-4, or Employee's Withholding Certificate, along with the Internal Revenue Service (IRS) employer withholding tables.

2. Federal Insurance Contributions Act (FICA) Taxes

FICA taxes are used to fund both Social Security and Medicare:

• Social Security taxes: The 2025 Social Security tax rate is 12.4%, split evenly between employers and employees at 6.2% each. Any earnings up to $176,100 are subject to Social Security tax, but earnings above that number (the 2025 wage base limit) are not taxed. 
• Medicare taxes: Medicare taxes are set at a total rate of 2.9%, with employees and employers each contributing 1.45%. These taxes have no wage base limit.
• Additional Medicare tax: Employees earning more than $200,000 annually are subject to an Additional 0.9% Medicare tax on income exceeding this threshold. Employers must begin withholding this tax as soon as an employee’s salary or earnings surpass $200,000 and continue withholding through the end of the calendar year. This tax is only paid by the employee — there is no employer share.

Self-employed individuals are responsible for paying all Social Security (12.4%), Medicare (2.9%), and any Additional Medicare tax (0.9%) contributions themselves.

3. Federal Unemployment Tax Act (FUTA) Tax

Paid exclusively by employers, FUTA tax applies to businesses that, in the prior or current calendar year, either:

• Paid $1,500 or more in wages in any quarter or
• Had at least one employee for 20 or more weeks

Or, household businesses that:

• Paid cash wages of $1,000 or more to household employees — anyone who performed household work in a private home, fraternity house, etc. — in any quarter of the current or prior year

Or, agricultural businesses that: 

• Paid cash wages of $20,000 or more to farmworkers in any quarter or
• Employed 10 or more farmworkers in the prior or current calendar year

If your business is required to pay FUTA, the 2025 tax rate is 6% on the first $7,000 of each employee’s wages, although timely state unemployment tax payments can qualify employers for up to a 5.4% credit. For example, instead of paying $420 per employee per year (6% of $7,000), employers in states without a FUTA credit reduction could pay only 0.6% of $7,000, or $42 per employee per year.

Employers in states subject to a FUTA credit reduction — which occurs when a state borrows from the federal government to cover its unemployment benefits and fails to repay on time — will not receive the full 5.4% credit. As a result, the employer will be required to pay a higher FUTA tax rate than employers in states without credit reductions.

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State Payroll Taxes

1. State Income Taxes (If Applicable)

Currently, nine US states do not impose a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If an employee resides in one of these states, your business is not required to withhold state income tax. However, if your employees live in any of the other 41 states with income tax, your business must know current state income tax rates and withhold the correct amount from their paycheck.

2. State Unemployment Insurance (SUI) Taxes

Each state has its own unique SUI tax rates and wage limits, which can be found in a Department of Labor (DOL) chart comparing SUI laws. In most states, employers are responsible for paying the SUI tax, but Alaska, New Jersey, and Pennsylvania also require employee contributions.

3. Paid Family Leave

Thirteen states and the District of Columbia offer mandatory state paid family leave programs funded through payroll taxes. If your employees live in one of these areas, you may need to withhold payroll taxes from their income, contribute on their behalf, or even purchase paid family leave plans from a private insurance market (as is the case in New York).

Here’s how these programs are supported:

• Employee-funded: California, Connecticut, Massachusetts, New Jersey, New York, Rhode Island, and Washington
• Employer-funded: District of Columbia
• Both employee- and employer-funded: Colorado, Delaware, Maine, Maryland, Minnesota, and Oregon 

Check the latest tax rates and income limits regularly to ensure your business is correctly withholding the appropriate amount from employee paychecks and staying compliant with state laws.

Local Payroll Taxes

City, County, or Municipal Taxes (If Applicable)

Some employees may be subject to city, county, or municipal taxes, depending on where they live or work. While not all employees will be impacted by these local taxes, your business must know which local governments impose additional taxes.

For example, New York City requires all residents to pay local income tax on their taxable income. Employees may be subject to local taxes even if they work in a different location, so it's essential to stay aware of any applicable local payroll taxes.

Employer Responsibilities

Stay compliant with payroll tax regulations by understanding your tax obligations as an employer: 

1. Withhold payroll taxes from employee pay.

As an employer, you’re responsible for accurately calculating tax withholdings based on each employee’s Form W-4. Your business should collect this form from each new hire when they join, as well as after any major life changes — like getting married or having a baby. 

W-4s provide essential details such as an employee’s address, filing status, multiple job adjustments, tax credits, additional income, tax deductions, and extra withholding preferences. This information helps your business make accurate payroll withholding calculations and prevents employees from underpaying or overpaying their taxes.

2. Contribute to employer-paid payroll taxes.

Your business is on the hook for contributing to several payroll taxes, including:

• Social Security tax
• Medicare tax
• Federal unemployment tax
• State unemployment tax
• Paid family leave taxes (if applicable in your state)

Employers are not responsible for paying federal income tax or Additional Medicare tax for high earners, as those are solely deducted from employee taxable wages.

3. Remit taxes to the appropriate federal, state, or local agencies.

Once you've calculated the necessary payroll taxes, the next step is to deposit both employee and employer contributions. There are two deposit schedules — monthly and semiweekly — and your required schedule depends on your total tax liability reported on Forms 941 (line 12), 943 (line 13), 944 (line 9), or 945 (line 3). If your total taxes on any of these forms are:

• Greater than $50,000: You must follow the semiweekly deposit schedule. 
• $50,000 or less: You will follow the monthly deposit schedule.

There is one exception. If your business accumulates a tax liability exceeding $100,000 in a single day, you are subject to the $100,000 Next-Day Deposit Rule. This requires you to deposit the tax by the next business day, regardless of your usual deposit schedule. Once this happens, you will be required to follow the semiweekly deposit schedule for the remainder of the calendar year and the following year. Additionally, late deposits will automatically incur penalties ranging from 2% to 15% of the taxes due on Form 941, depending on how delayed the payment is.

Federal tax deposits should be made electronically via the free Electronic Federal Tax Payment System (EFTPS). The process for paying state and local taxes varies by jurisdiction, so be sure to check local guidelines. Alternatively, you can have a tax professional, financial institution, or payroll service, like Lattice Payroll, handle the electronic deposits on your behalf.

4. File necessary forms.

In addition to withholding and depositing payroll taxes, employers are required to file several key forms, like:

• Form 941: A quarterly tax form reporting income taxes, Social Security, and Medicare taxes withheld from employees' paychecks
• Form 940: An annual return reporting FUTA payments
• Form 943: An annual return for agricultural employers to report farm workers' wages and the associated taxes
• Form 944: An annual form reporting payroll taxes for small businesses with an annual tax liability of $1,000 or less, only required for those notified by the IRS to file annually instead of quarterly
• Form 945: An annual form to report tax withheld from non-payroll income tax, like pensions or retirement distributions
• Form W-2: An annual statement that provides a summary of each employee's gross wages and the taxes withheld during the previous year

Semiweekly depositors must also complete additional business tax forms:

• Schedule B must be submitted alongside your Form 941.
• Agricultural employers must also complete Form 943-A and submit it with Form 943. 
• If you file Form 944 or Form 945, complete Form 945-A and submit it with your return.

Also, remember to review any state or local forms that may be required for filing.

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Best Practices for Managing Payroll Taxes

Managing payroll taxes accurately and efficiently is critical to staying compliant and avoiding costly mistakes. Here are some key best practices to ensure your business handles payroll taxes effectively:

1. Maintain accurate withholding.

Always double-check tax calculations and withholdings before processing payroll. This ensures that the right amount of tax is withheld from each employee's paycheck. Make use of tax tables, employees’ W-4s, and payroll software to ensure that your calculations are correct. Mistakes can lead to underpayment or overpayment of taxes, both of which can result in penalties or refunds that complicate your financial records.

2. Keep detailed records.

Keep accurate and up-to-date records of all tax filings and payments in case of future audits. This includes payroll tax returns, deposit receipts, employee forms, and records of past payments to federal, state, and local tax agencies. Proper recordkeeping will not only help you stay compliant, but it will also come in handy if your business is ever audited.

3. Optimize for efficiency.

Using payroll software can help automate tax compliance, saving your payroll team time and effort. It streamlines the calculation of tax withholdings, ensures timely deposits, generates reports, and reduces administrative burdens. Automation also helps keep your business up-to-date with changing tax laws, ensuring accurate and compliant filings while minimizing errors.

How Lattice Payroll Simplifies Payroll Tax Compliance

Speaking of efficiency, Lattice Payroll helps streamline payroll tax compliance by automating key processes, reducing administrative tasks, and ensuring accuracy. Here’s how it works:

• Automates calculations and withholdings: Lattice calculates payroll taxes based on the latest federal, state, and local laws, ensuring accurate withholdings for each paycheck.
• Stays current on tax law changes: Lattice keeps your payroll system updated with the latest tax laws, reducing the risk of noncompliance.
• Offers detailed reporting: Lattice’s reporting tools track payroll tax data with precision, ensuring accurate records for audits and compliance.
• Leverages AI to identify and fix issues: Lattice’s AI-powered anomaly detection helps prevent overages and pay surprises.

Ready to simplify payroll tax management? Schedule a demo and experience Lattice Payroll today.

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