What Is Payroll Tax? A Complete Guide for Small Businesses (2025)

Every paycheck triggers taxes worth 15.3% of wages. Miss a deadline, and penalties start at 2%. Get the math wrong, and the IRS comes knocking.

What is payroll tax exactly? It's the mandatory withholding from every employee's wages that funds Social Security, Medicare, and unemployment benefits. You split these taxes with your employees, handle the calculations, and send everything to the government on strict deadlines.

The complexity multiplies fast. Federal rates change annually. State rules vary wildly. Overtime and bonuses need different calculations. Multi-state employees add another layer of confusion.

This guide shows you exactly what payroll taxes include in 2025, who pays each portion, and how to calculate everything correctly. No tax degree required.

You'll learn current rates, see real examples, and understand why payroll tax differs from income tax. Plus, discover how to avoid the penalties that drain profits from 100,000+ small businesses every year.

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TL;DR: Your complete payroll tax definition and 2025 guide

Payroll taxes are mandatory withholdings from wages that fund Social Security, Medicare, and unemployment programs. Every business with employees must handle them correctly or face penalties.

2025 payroll tax rates:

• Social Security: 6.2% each (employee and employer), capped at $176,100 in wages
• Medicare: 1.45% each side with no cap, plus 0.9% extra on wages over $200,000 (employee only)
• FUTA: 0.6% after credits on first $7,000 per employee (employer only)
• SUTA: 0.5% to 6%+ depending on your state and claims history (usually employer only)

Total cost per paycheck:

Your employees pay 7.65% minimum. You match that 7.65% plus unemployment taxes. Self-employed workers pay both portions—15.3% total.

Key difference from income tax:

Payroll taxes use flat rates and fund specific programs. Income taxes use progressive rates (10% to 37%) and fund general government operations. Both show on pay stubs, but only you match payroll taxes.

Understanding payroll taxes means knowing these rates, deadlines, and calculations. Miss any piece, and penalties start immediately.

What is payroll tax?

Here’s a one-sentence definition for payroll tax: mandatory taxes on employee wages that fund Social Security, Medicare, and unemployment insurance programs.

Unlike income taxes that fund general government operations, payroll taxes go directly to specific social insurance programs. You split the cost with your employees, handle the math, and send everything to federal and state agencies on strict schedules.

What's included in payroll taxes

FICA taxes (Federal Insurance Contributions Act):

• Social Security: 6.2% from employee, 6.2% from employer
• Medicare: 1.45% from employee, 1.45% from employer
• Shows on every pay stub as separate line items

Federal unemployment tax (FUTA):

• 6% on first $7,000 of wages per employee
• Credits reduce this to 0.6% when you pay state unemployment on time
• Employer pays 100%—employees contribute nothing

State unemployment tax (SUTA):

• Rates vary from 0.5% to over 10% based on your claims history
• Most states charge employers only
• Alaska, New Jersey, and Pennsylvania also charge employees

Additional state requirements:

• Six states require disability insurance contributions
• Thirteen states plus DC mandate paid family leave contributions
• Some cities add local payroll taxes

The critical difference from income tax

Payroll taxes hit every paycheck at fixed rates. Income taxes use brackets that increase with earnings.

You match your employees' FICA contributions dollar for dollar. Income taxes? Employees pay alone.

Social Security caps at $176,100 in 2025. Income taxes never cap.

Bottom line: Federal law requires you to withhold these taxes correctly and remit them on time. The IRS doesn't negotiate on deadlines or math errors.

How does payroll tax work?

Understanding payroll taxes starts with knowing the six-step process that happens every pay period.

The payroll tax process

1. Employee earns wages: Hours worked × hourly rate = gross pay. Simple math that triggers complex tax obligations.

2. Calculate tax obligations: Apply current rates to gross pay:

• Social Security: 6.2% (up to $176,100 annual wages)
• Medicare: 1.45% (no limit)
• Federal and state unemployment rates

3. Withhold from employee paycheck: Take out their portion: 7.65% for FICA taxes. This happens before they see a penny.

4. Add employer contributions: Match every FICA dollar your employee pays. Add unemployment taxes from your own pocket.

5. Remit to government agencies: Send combined amounts to IRS and state agencies. Semi-weekly if payroll exceeds $50,000 annually. Monthly for smaller payrolls.

6. The government distributes funds: IRS routes money to Social Security Administration and Medicare trust funds. States manage unemployment insurance pools.

How does payroll tax work in practice?

Take an employee earning $1,000 weekly:

Employee pays:

• Social Security: $62.00
• Medicare: $14.50
• Total: $76.50 per week

You pay:

• Social Security: $62.00 (matching)
• Medicare: $14.50 (matching)
• FUTA: $6.00 (first 7 weeks only)
• SUTA: Varies by state
• Total: $82.50+ early in year, $76.50+ after FUTA cap

Combined weekly cost: $153 minimum in FICA taxes alone, before any state obligations.

The process repeats 52 times a year. Miss one step, face penalties starting at 2% and climbing to 15% for chronic failures

Types of payroll taxes and 2025 rates

Four main payroll taxes hit every business. Here's what payroll taxes include, who pays what, and where the money goes.

Social Security tax

The basics:

• Employee pays: 6.2%
• Employer pays: 6.2%
• Combined: 12.4%
• 2025 wage base: $176,100

Once an employee hits $176,100 in wages, Social Security tax stops for both sides. The cap resets every January 1st.

This funds retirement benefits, disability insurance, and survivor benefits for 68 million Americans monthly.

Medicare tax

The basics:

• Employee pays: 1.45%
• Employer pays: 1.45%
• Combined: 2.9%
• Wage base: None—you pay on every dollar

Additional Medicare tax:

• 0.9% on wages over $200,000 (single filers)
• 0.9% on wages over $250,000 (married filing jointly)
• Employee pays alone—no employer match

This funds Hospital Insurance (Part A) for Americans 65+ and certain disabled individuals.

Federal unemployment tax (FUTA)

The basics:

• Employer pays: 6% on first $7,000 per employee
• Credit reduction: Down to 0.6% when you pay state unemployment on time
• Maximum annual cost: $42 per employee
• Employee pays: Nothing

Once an employee earns $7,000, your FUTA obligation ends for the year. Miss state unemployment payments, and you lose the credit—costing you $420 per employee instead of $42.

This backs up state unemployment systems and funds extended benefits during recessions.

State unemployment tax (SUTA)

The basics:

• Employer pays: 0.5% to 10%+ depending on state and experience
• Wage bases: $7,000 (Arizona) to $62,500 (Washington) in 2025
• Employee pays: Only in Alaska, New Jersey, and Pennsylvania

Your rate depends on three factors:

1. Your state's rate structure
2. Your industry classification
3. Your claims history (experience rating)

New businesses start at standard rates (typically 2.7% to 3.4%). Rates adjust annually based on former employees' unemployment claims.

Additional state and local taxes

State-specific requirements:

• Disability insurance: California, Hawaii, New Jersey, New York, Rhode Island
• Paid family leave: 13 states plus DC
• Local taxes: 10 states allow cities/counties to impose additional withholding

Each program has different rates, wage bases, and employer/employee splits. California's disability insurance, for example, charges employees 0.9% on wages up to $153,164 in 2025.

Quick reference: Total payroll tax burden

For a $50,000 salary:

• Employee pays: $3,825 minimum (7.65%)
• Employer pays: $3,867 to $4,500+ (varies by state)
• Combined: $7,692 to $8,325+

For a $200,000 salary:

• Employee pays: $14,368.20 (stops at wage cap for Social Security)
• Employer pays: $14,410.20+ (varies by state)
• Combined: $28,778.40+

Missing any of these means penalties. Understanding them means budgeting accurately for your true cost per employee.

Who pays payroll taxes

Payroll taxes split between employees, employers, and for the self-employed, both. Here's who pays what.

What employees pay

Your employees pay 6.2% for Social Security and 1.45% for Medicare on every paycheck. Total: 7.65% comes out of their gross pay.

High earners pay more. Once their annual wages hit $200,000 for single filers or $250,000 for married couples filing jointly, they pay an additional 0.9% Medicare tax on everything above that threshold.

Employees don't pay federal or state unemployment taxes. Those come entirely from your pocket.

What employers pay

You match your employees' contributions dollar for dollar. Social Security: 6.2%. Medicare: 1.45%. You pay the same rates they do on the same wages.

Then you add unemployment taxes on top. Federal unemployment runs 0.6% on the first $7,000 per employee after credits. State unemployment varies from 0.5% to 6% or more depending on your state, industry, and claims history.

You don't match the additional 0.9% Medicare tax that high earners pay. That's employee-only.

What self-employed workers pay

Self-employed individuals pay both the employee and employer portions. Social Security: 12.4%. Medicare: 2.9%. Total: 15.3% on net self-employment income.

The upside? Self-employed workers can deduct half of their self-employment tax when calculating adjusted gross income, reducing their overall tax burden slightly.

Get the math right every time

Know exactly what you owe—and when. Homebase splits employer and employee portions automatically, calculates rates correctly, and handles the withholding so you don't have to track it manually.

What payroll taxes fund

Every payroll tax dollar you withhold funds specific programs. Here's where the money goes.

Social Security (6.2%)

Your Social Security taxes split between two funds:

• Old-Age and Survivors Insurance: Monthly retirement benefits for workers and surviving family members
• Disability Insurance: Income for workers who can't work due to qualifying disabilities

About 68 million Americans receive Social Security benefits each month. Your taxes today fund current beneficiaries. Your future benefits get funded by the next generation's taxes.

Medicare (1.45%)

Medicare taxes fund Hospital Insurance (Part A):

• Inpatient hospital stays
• Skilled nursing care
• Hospice care
• Home health services for people 65+

The program also covers younger people with disabilities and those with end-stage renal disease.

Unemployment taxes

Federal and state unemployment taxes fund temporary income for workers who lose their jobs through no fault of their own.

Most states provide up to 26 weeks of unemployment benefits. Duration varies by state and economic conditions.

During recessions, federal programs extend benefits beyond standard weeks. Your FUTA taxes fund these extensions and back up state systems when funds run low.

Payroll tax vs. income tax

Both appear on the same pay stub. Both are mandatory. But they work completely differently.

Payroll taxes

• Flat rates: Everyone pays 7.65% for FICA up to the Social Security wage cap
• Specific funding: Money goes directly to Social Security and Medicare trust funds
• Shared cost: Employers and employees split the bill equally
• Wage caps: Social Security tax stops at $176,100 annual wages

Income taxes

• Progressive rates: Federal rates range from 10% to 37% based on income level
• General funding: Pays for everything from defense to infrastructure
• Employee only: Employers withhold but don't contribute matching amounts
• No caps: You pay on every dollar earned, no matter how high

What shows on your pay stub

Both taxes appear as separate line items:

• FICA taxes show as Social Security and Medicare withholdings
• Federal and state income taxes show as separate deductions

Understanding the difference helps you read your pay stub and know where your money goes.

Calculate payroll taxes with examples

The math behind payroll taxes looks complicated. Break it down step by step, and it becomes manageable.

Example 1: $50,000 annual salary

Here's what you withhold and pay for an employee earning $50,000 per year:

Monthly breakdown:

• Gross monthly pay: $4,167 ($50,000 ÷ 12)
• Employee Social Security (6.2%): $258.35
• Employee Medicare (1.45%): $60.42
• Employee total withheld: $318.77

Your employer contributions:

• Employer Social Security (6.2%): $258.35
• Employer Medicare (1.45%): $60.42
• Employer FUTA (0.6% for first 7 weeks): ~$4.17
• Employer total: $322.94 (drops to $318.77 after FUTA cap)

Combined monthly payroll taxes: $641.71 (early in year), $637.54 (after FUTA cap)

Example 2: $250,000 annual salary

High earners hit wage caps and additional taxes. Here's the annual breakdown:

Employee pays:

• Social Security (6.2% up to $176,100): $10,918.20
• Medicare (1.45% on all wages): $3,625.00
• Additional Medicare (0.9% over $200,000): $450.00
• Employee annual total: $14,993.20

Employer pays:

• Social Security (6.2% up to $176,100): $10,918.20
• Medicare (1.45% on all wages): $3,625.00
• FUTA ($42 maximum): $42.00
• Employer annual total: $14,585.20

Key differences from Example 1:

• Social Security stops at $176,100 (saves $4,581.80 in employee taxes, $4,581.80 in employer taxes)
• Additional 0.9% Medicare kicks in over $200,000 (costs employee extra $450)
• Employer doesn't match the additional Medicare tax

The takeaway

Manual calculations work for simple scenarios. Add overtime, multiple pay rates, multi-state employees, or mid-year hires, and the complexity multiplies fast.

Stop dividing by 60. Calculate payroll taxes automatically—including employer portions, overtime, and multi-state rates.

Payroll taxes for the self-employed

Self-employed workers pay both sides of payroll taxes. That means you're covering what an employer would normally pay plus what an employee pays.

Employment tax basics

Self-employment tax is 15.3% of your net business income:

• Social Security: 12.4% on first $176,100 of income
• Medicare: 2.9% on all income
• Additional Medicare: 0.9% on income over $200,000 (single filers)

Quarterly estimated payments

The IRS doesn't wait until April to collect. If you expect to owe $1,000 or more in taxes, you must make quarterly estimated payments:

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15 (following year)

Miss a payment, and you'll face penalties plus interest.

The tax break

You can deduct half your self-employment tax (the employer-equivalent portion) when calculating your adjusted gross income. This deduction reduces your income tax but doesn't affect your self-employment tax itself.

Example: Pay $10,000 in self-employment tax, deduct $5,000 from your taxable income.

State payroll tax rules

Federal payroll taxes stay consistent nationwide. State rules vary dramatically from state to state.

States with no income tax

Nine states don't tax income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

No income tax withholding means less paperwork. But you still withhold and remit federal payroll taxes (Social Security, Medicare, FUTA).

States with additional requirements

Some states add extra U.S. payroll taxes beyond federal requirements:

• Disability insurance: California, Hawaii, New Jersey, New York, Rhode Island, Puerto Rico
• Paid family leave: 13 states plus DC mandate payroll contributions
• Local income taxes: Cities and counties in 10 states impose their own withholding

SUTA rate variations

State unemployment tax rates range dramatically:

• New employer rates: Typically 2.7% to 3.4% on first $7,000-$15,000 of wages
• Experienced employer rates: 0.1% to 10%+ depending on claims history
• Wage base: Ranges from $7,000 (Arizona, California) to $62,500 (Washington) in 2025

Your rate adjusts annually based on former employees' unemployment claims. More claims equal higher rates.

Track compliance across every state you operate in. Homebase updates tax rates automatically when laws change.

Manage payroll tax compliance

Payroll tax compliance gets a bad rap, but it's three things: file the right forms, hit your deadlines, get the math right. Mess any of those up and penalties pile on fast.

Payroll tax forms you need

Here's what you'll file:

• Form 941: Reports quarterly payroll taxes. Due the last day of the month after each quarter ends (April 30, July 31, October 31, January 31).
• Form 940: Reports federal unemployment taxes annually. Due January 31.
• W-2s: Shows employee earnings and withholdings for the year. Due to employees by January 31.

Common payroll tax mistakes

The IRS doesn't mess around. Miss a filing deadline and you're paying a 15% penalty. Don't deposit your withheld taxes on schedule and it costs 2% to 15% depending on how overdue you are.

Even small errors on your forms turn into reconciliation problems that waste hours of your time.

Stay compliant

Automate your tax deposits so deadlines never sneak up on you. And keep your withheld taxes in a completely separate account from your operating funds. That way you're never tempted to borrow from money that isn't actually yours.

"I have used many payroll systems over the years and this is by far the most user friendly. Having an app the employees can download is a huge plus and Homebase is constantly making improvements.” – Esther Pierce, Owner, Alphabet Kids English Academy

How Homebase handles payroll taxes

You know that Sunday night feeling when you're triple-checking payroll math? We handle all of it.

Automatic tax calculations

Federal, state, local—we calculate every tax correctly based on current rates and wage caps. You're done dividing by 60 and second-guessing percentages.

Real-time rate updates

Tax rates change constantly. We update automatically so you never have to hunt down new Social Security wage bases or state unemployment rates. You just run payroll.

Multi-state compliance

Employees in different states? We track every state's withholding rules, unemployment requirements, and paid leave laws. You stay compliant without memorizing 50 different tax codes.

Direct time clock integration

Hours clocked flow straight into payroll. Overtime, PTO, regular hours—no copying numbers between systems, no transcription errors, no manual entry.

"Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now our entire team logs in and out quickly and easily with the Homebase app, and all I have to do is send their hours to my payroll program with the click of a button." - Kathleen Smith, Founder, Smiling Tree Toys

Join 100,000+ businesses using Homebase. Start your free trial today.

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FAQs about payroll taxes

What is a payroll tax in simple terms?

Payroll taxes are mandatory taxes on wages that fund Social Security, Medicare, and unemployment programs. You withhold your employees' share from their paychecks, add your matching contribution, and send both to the government.

What are payroll taxes used for?

Three programs: Social Security for retirement and disability benefits, Medicare for healthcare coverage at 65+, and unemployment insurance for workers who lose their jobs. Your taxes today fund current beneficiaries. Your employees' future benefits get funded by the next generation.

Who pays payroll taxes?

You and your employees both pay, but different amounts. Employees pay 7.65% (6.2% Social Security, 1.45% Medicare). You match that 7.65%. You also pay federal and state unemployment taxes entirely on your own.

What's the difference between payroll tax and income tax?

Payroll taxes use flat rates and fund specific programs. Income taxes use progressive rates and fund general government operations. Social Security caps at $176,100. Income tax has no cap. You match payroll taxes but not income taxes.

How much are payroll taxes in 2025?

Combined rate is 15.3%—split evenly between you and your employee. Each pays 6.2% for Social Security (up to $176,100) and 1.45% for Medicare. High earners pay extra 0.9% Medicare over $200,000. You pay 0.6% FUTA on the first $7,000 per employee.

Which payroll taxes are paid by the employer only?

Federal unemployment (FUTA) and state unemployment (SUTA)—employees don't contribute. FUTA runs 0.6% on the first $7,000 per employee. SUTA varies by state, typically 0.5% to 6%.