Payroll taxes

Payroll taxes are the taxes calculated on wages and paid alongside each payroll run — partly withheld from the employee's pay, partly paid by the employer on top of it. They fund Social Security, Medicare, and unemployment insurance, and they are why gross pay and take-home pay are different numbers on every pay stub.

How it works in the United States

For a typical employee there are three streams:

• FICA: Social Security and Medicare contributions, split between employee and employer at rates set in federal statute, with the Social Security wage base adjusted annually by the Social Security Administration. An additional Medicare withholding applies above a high-income threshold.
• Unemployment taxes: FUTA, the federal unemployment tax, is paid by the employer only, alongside state unemployment tax (SUTA) at rates each state assigns based on the employer's history.
• Income tax withholding: federal income tax withheld according to the employee's Form W-4 and IRS tables, plus state and local income tax where it exists.

Employers must deposit these on IRS schedules and report on quarterly and annual forms — and the duty applies to employees, which is why worker classification matters so much: misclassify an employee as a contractor and the unpaid payroll taxes land back on the business.

Internal Revenue Code — FICA (26 U.S.C. ch. 21) and FUTA (ch. 23), administered by the IRS; rates and wage bases set by Congress and indexed annually; state unemployment taxes set by each state.

Related terms

• W-2 vs 1099
• Pay stub
• Workers' compensation