Understanding Payroll Taxes: A Complete Guide 2026
Payroll taxes are mandatory federal, state, and local taxes that you, as an employer, must withhold from your employees’ wages and also contribute to yourself. These taxes fund programs like Social Security, Medicare, and unemployment benefits.
By the end of this article, you’ll understand each type of payroll tax, the key details you need to watch out for, and practical steps you can take to handle them confidently and avoid surprises.
What Are Payroll Taxes?
Payroll taxes are the taxes you, as an employer, are required to withhold from your employees’ compensation: wages, bonuses, commissions, etc.
These taxes fund essential government programs like Social Security, Medicare, and unemployment insurance.
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So every time you pay your team, you’re not just sending out salaries, you’re also acting as a tax collector for the government by calculating exact amounts, withholding them, matching certain portions, and sending everything to the right government agencies.
Even if you have only one employee on your payroll, handling your taxes incorrectly by underpaying, overpaying, paying late, or filing the wrong forms can trigger penalties, a lot of payroll overhead, and administrative headaches.
What Do Payroll Taxes Cover?
Now that you understand the what, it's time to break down the how much. Payroll taxes fund specific social insurance programs, and they come in a few buckets, explained below.
One note before we start: federal income tax withholding isn't technically a payroll tax, but it's handled in the same payroll run and reported on the same forms, so we've included it here. We'll break down how the two differ in the next section.
Federal income tax withholding
Income tax withholding is a prepayment toward the employee's annual income tax bill, not a contribution to a dedicated program. It's the process of deducting a portion of an employee's wages and submitting it to the IRS throughout the year. It helps employees avoid large tax bills or underpayment penalties when filing their annual return.
The amount you withhold depends on several factors, with most of the crucial information laid out in the Form W-4.
Employees fill it out when they're hired, and it includes details like their filing status, number of dependents, additional income, deductions, additional withholding amounts, etc.
FICA taxes: Social Security and Medicare
FICA (Federal Insurance Contributions Act) taxes consist of Social Security and Medicare taxes, and these are usually what most people associate with payroll taxes.
Both employers and employees contribute to these equally.
The Social Security tax is 6.2%, paid by both the employee and the employer, for a total of 12.4%. As of 2026, the wage base limit (the maximum wage subject to the tax) for Social Security is $184,500, up from $176,100 for 2025.
The tax for Medicare is 1.45% for the employer and 1.45% for the employee, for a total Medicare tax of 2.9%.
For individuals earning over $200,000, the employer is required to withhold an additional 0.9% on the wages paid over $200K until the end of the calendar year.
Employers aren’t required to match this amount; you must only withhold this from your employee’s wages.
Your job is to withhold the employee’s tax contribution, match it for the social security and medicare parts (a total of 7.65%), and pay both halves to the government.
Federal unemployment tax (FUTA)
Employers are responsible for paying the Federal Unemployment Tax Act (FUTA) tax, which funds unemployment benefits for workers who have lost their jobs.
This one’s 100% your responsibility; employees don’t contribute.
The FUTA tax rate is 6% on the first $7,000 of wages paid to each employee in a calendar year.
However, you (the employer) may receive a credit of up to 5.4% for paying state unemployment taxes on time and in full, resulting in a net FUTA tax rate of 0.6%.
So, if you’re eligible, you’ll pay only $42 per employee per year in FUTA.
State unemployment tax (SUTA)
Employers are also responsible for paying state unemployment taxes, which fund unemployment benefits at the state level.
State unemployment tax rates and wage bases vary by state and change every year. The table below shows 2026 wage bases and the most recently published rate ranges. Confirm your exact rate with your state agency.
| State | 2026 SUTA Wage Base | Employer Rate Range | Notes |
|---|---|---|---|
| Alabama | $8,000 | 0.14–5.34% | Employee contribution: none; new-employer rate: Schedule A (2.7%); 0.06% ESA training tax; nonprofits may elect to reimburse rather than pay SUTA |
| Alaska | $54,200 | 1.0–5.4% | Employee contribution: 0.50%; new-employer rate varies by schedule (no fixed "new" rate); no extra taxes; nonprofits may elect to reimburse |
| Arizona | $8,000 | 0.04–9.72% | Employee contribution: none; new-employer rate: 2.0%; no additional surtaxes; nonprofits may elect to reimburse |
| Arkansas | $7,000 | 0.20–10.10% | Employee contribution: none; new-employer rate: 1.9%; 0.10% administrative assessment; nonprofits may elect to reimburse |
| California | $7,000 | 1.5–6.2% | Employee contribution: none (employees pay SDI instead); new-employer rate: 3.4% (2026 schedule is F+, which is Schedule F plus a 15% surcharge); 0.10% Employment Training Tax (ETT); nonprofits may elect to reimburse |
| Colorado | $30,600 | 0.64–8.86% | Employee contribution: none; new-employer rate: 3.05% (3.08–7.65% for construction); no separate training tax; support and solvency surcharges vary by industry; nonprofits may elect to reimburse |
| Connecticut | $27,000 | 1.1–8.9% | Employee contribution: none; new-employer rate: 2.2%; no additional surtaxes; nonprofits may elect to reimburse |
| Delaware | $14,500 | 0.30–5.40% | Employee contribution: none; new-employer rate: 1.0%; 0.20% special training assessment; nonprofits may elect to reimburse |
| D.C. | $9,000 | 1.9–7.4% | Employee contribution: none; new-employer rate: 2.7%; 0.20% administrative assessment; nonprofits may elect to reimburse |
| Florida | $7,000 | 0.1–5.4% | Employee contribution: none; new-employer rate: 2.7%; no additional surtaxes; nonprofits may elect to reimburse |
| Georgia | $9,500 | 0.04–8.1% | Employee contribution: none; new-employer rate: 2.64% (fixed through 2026); 0.06% administrative assessment; nonprofits may elect to reimburse |
| Hawaii | $64,500 | 0.0–5.6% | Employee contribution: none (employees pay TDI instead); new employer: Schedule C (varies by business type); 0.01% employment-training assessment; nonprofits may elect to reimburse |
| Idaho | $58,300 | 0.225–5.4% | Employee contribution: none; new-employer rate: 1.00%; small workforce and admin surtaxes (0.00–0.00675% plus 0.00–0.03825%); nonprofits may elect to reimburse |
| Illinois | $14,250 | 0.2–7.3% | Employee contribution: none; new-employer rate: 3.65% (includes FRR); 0.55% fund-building (FRR) tax; nonprofits may elect to reimburse |
| Indiana | $9,500 | 0.5–7.4% | Employee contribution: none; new employer: 2.5% (1.6% for governmental employers); no solvency surcharge; nonprofits may elect to reimburse |
| Iowa | $20,400 | 0–7.0% | Employee contribution: none; new employer: 1.0% (7.0% for construction); no additional surtaxes; nonprofits may elect to reimburse |
| Kansas | $15,100 | 0.00–6.65% | Employee contribution: none; new employer: 1.75% (5.55% for construction); no fund-building surcharge (0%); nonprofits may elect to reimburse |
| Kentucky | $12,000 | 0.3–9.0% | Employee contribution: none; new employer: Schedule A (2.7%; 9–10% for construction); 0.075% SCUF (state training fund); nonprofits may elect to reimburse |
| Louisiana | $7,000 | 0.09–6.2% | Employee contribution: none; new employer: varies by industry (NAICS-based); Incumbent Worker Training tax plus Integrity Social Charge Fund (varies); nonprofits may elect to reimburse |
| Maine | $12,000 | 0.0–5.75% | Employee contribution: none; new employer: varies by schedule (confirm with Maine DOL); 0.14% CSSF plus 0.16% UPAF workforce fund taxes; nonprofits may elect to reimburse |
| Maryland | $8,500 | 0.3–7.5% | Employee contribution: none; new employer: Table A (2.6%; 3.3% for construction); no additional assessments; nonprofits may elect to reimburse |
| Massachusetts | $15,000 | 0.83–12.65% | Employee contribution: none; new employer: Schedule D (2.13%; 5.45% for construction); 0.056% workforce training tax (WTF); nonprofits may elect to reimburse |
| Michigan | $9,000 (confirm; some sources list $9,500) | 0.06–10.30% | Employee contribution: none; new employer: 2.7% (4.9% for construction); no additional surtaxes; nonprofits may elect to reimburse |
| Minnesota | $44,000 | 0.40–8.90% | Employee contribution: none; new employer: varies by industry (1.0–8.9%); 0.10% workforce development assessment; 5% solvency surcharge (fund deficit); nonprofits may elect to reimburse |
| Mississippi | $14,000 | 0.2–5.4% | Employee contribution: none; new employer: 1.0–1.2% (graduated by payroll); 0.2% combined workforce surcharges (MS Works, training); nonprofits may elect to reimburse |
| Missouri | $9,000 | 0.0–6.0% | Employee contribution: none; new employer: 2.376% (1.00% for nonprofits); 0.02% automation surcharge; nonprofits may elect to reimburse (pay 1% vs. 2.376%) |
| Montana | $47,300 | 0.0–6.12% | Employee contribution: none; new employer: Schedule 1 (1.0–2.0% by payroll size); 0.13–0.18% Admin Fund Tax; nonprofits may elect to reimburse |
| Nebraska | $9,000 / $24,000 | 0–5.4% | Employee contribution: none; new employer: 1.25% (5.4% for construction); 20% SUIT allocation surcharge on SUI rate; higher base ($24,000) for employers in the highest rate group; nonprofits may elect to reimburse |
| Nevada | $43,700 | 0.25–5.4% | Employee contribution: none; new employer: 2.95%; 0.05% Career Enhancement Program surcharge; nonprofits may elect to reimburse |
| New Hampshire | $14,000 | 0.1–7.0% | Employee contribution: none; new employer: Table I (2.7%); 0.4% administrative surcharge; nonprofits may elect to reimburse |
| New Jersey | $44,800 | 0.6–6.4% | Employee contribution: yes, a small share of wages (under 1%); new employer: Table D (3.1%); 0.10% Workforce Development plus 0.0175% supplemental surcharges; nonprofits may elect to reimburse |
| New Mexico | $34,800 | 0.33–6.4% | Employee contribution: none; new employer: 1.0% (or industry average, if higher); no additional assessments; nonprofits may elect to reimburse |
| New York | $17,600 | 2.025–9.825% | Employee contribution: none; new employer: 4.025%; 0.075% Reemployment Services surcharge; 0.12% Interest Assessment surcharge; nonprofits may elect to reimburse |
| North Carolina | $34,200 | 0.06–5.76% | Employee contribution: none; new employer: 1.0%; no additional surtaxes; nonprofits may elect to reimburse |
| North Dakota | $46,600 | 0.14–9.69% | Employee contribution: none; new employer: 1.03% (6.09% for governmental employers; 9.69% for construction); no additional surtaxes; nonprofits may elect to reimburse |
| Ohio | $9,000 | 0.4–10.1% | Employee contribution: none; new employer: 2.7% (5.6% for construction); no additional surtaxes; nonprofits may elect to reimburse |
| Oklahoma | $25,000 | 0.3–9.2% | Employee contribution: none; new employer: Conditional Factor D (1.5%); 5% technology reinvestment surcharge; nonprofits may elect to reimburse |
| Oregon | $56,700 | 0.9–5.4% | Employee contribution: none; new employer: Schedule III (2.4%); quarterly offset surtax (about 0.109–0.139%); nonprofits may elect to reimburse |
| Pennsylvania | $10,000 | 1.419–10.373% | Employee contribution: 0.07%; new employer: 3.822% (10.592% for construction); 0% bond-interest surtax; nonprofits may elect to reimburse |
| Rhode Island | $30,800 | 0.89–9.49% | Employee contribution: none; new employer: Schedule G (0.89%); 0.21% Job Development Fund tax; higher base for max-rate employers; nonprofits may elect to reimburse |
| South Carolina | $14,000 | 0–5.4% | Employee contribution: none; new employer: 0.29%; 0.06% contingency surcharge (0.00% solvency); nonprofits may elect to reimburse |
| South Dakota | $15,000 | 0–8.8% | Employee contribution: none; new employer: Schedule C (1.2% general; 1.0% for construction); 0.02% admin plus 0–0.55% investment surtaxes; nonprofits may elect to reimburse |
| Tennessee | $7,000 | 0.01–10.0% | Employee contribution: none; new employer: varies by NAICS code; no additional surtaxes; nonprofits may elect to reimburse |
| Texas | $9,000 | 0.25–6.25% | Employee contribution: none; new employer: 2.7% (or industry average, if higher); 0.10% training investment tax; nonprofits may elect to reimburse |
| Utah | $50,700 | 0.2–7.2% | Employee contribution: none; new employer: 7.2% (for construction); other rates vary by industry; no additional surtaxes; nonprofits may elect to reimburse |
| Vermont | $15,400 | 0.4–5.4% | Employee contribution: none; new employer: Schedule 1 (1.0%); no additional surtaxes; nonprofits may elect to reimburse |
| Virginia | $8,000 | 0.1–6.2% | Employee contribution: none; new employer: 2.5% (6.2% for foreign or delinquent employers); 0.05% administrative fee; nonprofits may elect to reimburse |
| Washington | $78,200 | 0.27–6.02% | Employee contribution: none; new employer: 90% of industry average (minimum 1.0%); 0.03% EAF plus 0.03% solvency surtaxes; nonprofits may elect to reimburse |
| West Virginia | $9,500 | 1.5–8.5% | Employee contribution: none; new employer: Column C rates (2.7%; 8.5% for construction); no additional assessments; nonprofits may elect to reimburse |
| Wisconsin | $14,000 | 0.0–12% (small); 0.05–12% (large) | Employee contribution: none; new employer: Schedule D (3.05% small; 3.25% large; 2.90%/3.10% for construction); no additional surtaxes; nonprofits may elect to reimburse |
| Wyoming | $33,800 | 0–8.5% | Employee contribution: none; new employer: varies by employer class; 0.0423% Employment Support Fund plus 0.0143% Workforce Development training surtaxes; nonprofits may elect to reimburse |
Sources: EY 2026 State Unemployment Insurance Taxable Wage Bases
Some states also have additional taxes for disability programs and paid family leave programs.
Six states operate state disability insurance (SDI) programs, whereas another 16 have or will have paid family and medical leave insurance programs (PFML). Here’s a breakdown:
| State | Program(s) | Wage base (2026) | Employee rate | Employer rate | Key exemptions | Notes |
|---|---|---|---|---|---|---|
| California | SDI (includes paid family leave) | None (all wages) | 1.3% | 0% | – | Fully employee-funded. |
| Colorado | PFML | $184,500 | 0.44% | 0.44% (0% if <10 employees) | <10 employees (no employer share) | Confirm the 2026 rate with CDLE. |
| Connecticut | PFML | $184,500 | 0.5% | 0% | – | – |
| Delaware | PFML | $184,500 | 0.4% | 0.4% | <10 employees exempt; 10–24 employees cover only parental leave | Total rate is 0.8% (0.32% parental, 0.4% medical, 0.08% family caregiving), split evenly. |
| District of Columbia | PFML | None (all wages) | 0% | 0.75% | – | Employer-funded only. |
| Hawaii | TDI | Weekly wage cap (confirm 2026 figure) | Up to 0.5% of wages, capped weekly | Remainder of plan cost | – | 2026 figures weren't available when I checked. |
| Maine | PFML | $184,500 | 0.5% | 0.5% (0% if <15 employees) | <15 employees (no employer share) | Total rate is 1%. Benefits began May 1, 2026. |
| Maryland | PFML | Social Security base | 0.45% | 0.45% (0% if <15 employees) | <15 employees (no employer share) | Contributions begin Jan 1, 2027. Benefits begin Jan 2028. Total rate is 0.9%. |
| Massachusetts | PFML | $184,500 | About 0.46% (0.18% family + 0.28% medical) | About 0.42% (employers with 25+ employees) | <25 employees (no employer share) | Rates unchanged for 2026. Confirm the medical split on Mass.gov. |
| Minnesota | PFML | About $185,000 (Social Security base, rounded) | 0.44% | 0.44% | – | Program launched Jan 1, 2026. Total rate is 0.88%. Reduced rates may apply to some small employers. |
| New Hampshire | PFML (voluntary) | – | – | – | Optional participation | Employers may get a 50% tax credit for voluntary participation. |
| New Jersey | TDI; FLI | TDI: $44,800 (employer); FLI and employee TDI: $171,100 | TDI 0.19%; FLI 0.23% | TDI: 0.5% for new employers (0.1%–0.7% others); FLI: 0% | – | Confirm rates with NJ Division of Temporary Disability. |
| New York | DBL (SDI); PFL | PFL: annualized state average weekly wage (about $95,349) | PFL: 0.432% (max $411.91/yr); DBL: small flat weekly amount | DBL: remainder of plan cost; PFL: 0% | – | PFL is employee-funded. |
| Oregon | PFML | $184,500 | 0.6% | 0.4% (0% if <25 employees) | <25 employees (no employer share) | Employees pay 0.6% regardless of employer size. |
| Rhode Island | TDI; TCI | Confirm 2026 (one source says $100,000) | 1.3% | 0% | – | Employee-funded. |
| Vermont | PFML (voluntary) | – | – | – | Optional participation | – |
| Virginia | PFML (newly enacted) | – | – | – | – | Enacted April 2026. Contributions begin April 1, 2028. Benefits begin Dec 1, 2028. |
| Washington | PFML; LTC | PFML: $184,500; LTC: none | PFML: about 0.81% (71.43% of 1.13%); LTC: 0.58% | PFML: about 0.32% (0% if <50 employees) | <50 employees (no employer share) | Employees always pay their PFML share. WA Cares (LTC) is employee-paid, and employees may opt out with approved private coverage. |
Additional local or city taxes
In some jurisdictions, like New York City and San Francisco, local payroll taxes may apply. These can include local income taxes, employment taxes, and school district taxes.
International payroll taxes (if you hire outside the US)
If you’re hiring talent internationally, you’re often subject to that country’s tax laws, not just the US.
For example, in Canada, employers must handle the CPP (Canada Pension Plan), EI (Employment Insurance), and income tax remittance.
Since these rules and regulations vary significantly, it’s best to use a global payroll service or EOR (employer of record) to ensure you’re compliant.
Year-over-Year Changes (2025 to 2026)
- Social Security wage base: $176,100 → $184,500 (+$8,400).
- FICA tax rates and Medicare rates: Unchanged by statute.
- Supplemental wage withholding: Remains 22% (37% above $1 million), permanently extended by P.L. 119-21.
- New for 2026: P.L. 119-21 introduced deductions for qualified tips (up to $25,000) and qualified overtime compensation (up to $12,500 / $25,000 married filing jointly) from federal income tax — though these amounts remain subject to FICA. Employers must apply updated Form W-4 withholding instructions per Publication 15-T.
- 1099-NEC / W-2 reporting threshold: Raised from $600 to $2,000 for payments beginning in 2026 under P.L. 119-21.
Payroll Taxes vs. Income Tax Withholding
Both come out of the same paycheck and appear on the same pay stub, but they work very differently.
| Income Tax Withholding | Payroll Taxes | |
|---|---|---|
| What it is | A prepayment toward the employee's annual income tax bill | Dedicated contributions to social insurance programs |
| Who pays | Employee only (employer withholds and remits it) | Split for FICA; employer-only for federal unemployment (FUTA) and in most states (SUTA) |
| Where it goes | Federal, plus state and local income tax where applicable, funding general government spending | Social Security, Medicare, unemployment insurance, and in some states paid family leave or disability insurance |
| How it's calculated | Varies by wages, filing status, and W-4 selections | Flat percentages of wages |
| Rate structure | Progressive: higher earnings are taxed at higher rates | Mostly flat: 6.2% Social Security and 1.45% Medicare each for employer and employee |
| Wage cap | None | Social Security stops at the annual wage base ($184,500 in 2026). Medicare has no cap, and FUTA applies only to the first $7,000 per employee. |
| Final amount | Reconciled when the employee files a return, so it can result in a refund or a balance due | Final when paid, with no refund for over- or under-withholding (except for excess Social Security withheld from multiple employers) |
Key takeaways
- Both are held in trust. Withheld income tax and the employee's share of FICA belong to the government, not the business. Failing to remit them can trigger the Trust Fund Recovery Penalty, which can make owners or responsible individuals personally liable.
- Only FICA is truly split. The employer and employee each pay 6.2% for Social Security and 1.45% for Medicare, 7.65% each and 15.3% combined. High earners also owe an Additional Medicare Tax of 0.9% on wages over $200,000, paid by the employee alone.
- Withholding is an estimate. Adjusting the W-4 changes how much is withheld, not what the employee ultimately owes.
- Pre-tax deductions treat the two differently. Traditional 401(k) contributions reduce income tax wages but not Social Security or Medicare wages. Section 125 benefits like health premiums typically reduce both.
Self-Employment Tax
Self-employed individuals — sole proprietors, independent contractors, freelancers, and single-member LLC owners — do not have an employer to split FICA with. Instead, they pay the equivalent through the self-employment tax, reported on Schedule SE.
How Self-Employment Tax Is Calculated
The self-employment tax rate is 15.3% — the combined employee and employer shares of Social Security (12.4%) and Medicare (2.9%). However, the tax is not applied to gross self-employment income. The calculation uses a 92.35% multiplier to approximate the fact that employers do not pay FICA on the employer's share of FICA itself:
- Calculate net self-employment earnings (Schedule C net profit, or net farm income from Schedule F).
- Multiply net earnings by 92.35% to arrive at the self-employment tax base.
- Apply 12.4% for Social Security on the tax base up to the $184,500 wage base (reduced by any wages from a W-2 job that already had Social Security withheld).
- Apply 2.9% for Medicare on the full tax base with no cap.
- If the self-employment tax base exceeds $200,000 ($250,000 married filing jointly), apply the additional 0.9% Medicare tax on the excess.
The Deductible Half
Self-employed individuals may deduct 50% of their self-employment tax as an adjustment to gross income on Schedule 1 of Form 1040. This deduction reduces income tax but does not reduce self-employment tax itself. It is designed to approximate the tax treatment of employees, whose employer-paid FICA is never included in their taxable income.
Quarterly Estimated Payments
Self-employed individuals generally must make quarterly estimated tax payments using Form 1040-ES if they expect to owe $1,000 or more in combined income and self-employment tax for the year. The quarterly deadlines are April 15, June 15, September 15, and January 15 of the following year. Failure to make timely estimated payments triggers an underpayment penalty under IRC Section 6654.
For freelancers and gig workers, the 15.3% self-employment tax is often a bigger surprise than income tax, because there is no employer absorbing half the cost. A self-employed individual earning $100,000 in net profit will owe approximately $14,130 in self-employment tax alone, before any income tax. Understanding this obligation — and setting aside funds quarterly — is essential for avoiding year-end tax shock.
How To Calculate Payroll Taxes (With Examples)
To see how payroll works in practice, let's follow Jamie, a marketing manager in California who earns $100,000 a year and is paid monthly. Jamie files as single with no other W-4 adjustments and contributes $500 a month to a traditional 401(k). That contribution isn't subject to federal or state income tax, but it is still included in wages for Social Security, Medicare, and FUTA.
Step 1: Calculate Gross Pay
Gross pay is everything an employee earns before any deductions. That includes wages, salaries, bonuses, commissions, tips, and any other taxable compensation.
- Hourly employees: Multiply hours worked by the hourly rate. Non-exempt employees must be paid overtime at 1.5x their regular rate for hours over 40 in a workweek. Some states, such as California, have additional daily overtime rules.
- Salaried employees: Divide annual salary by the number of pay periods (for example, 26 for biweekly, 24 for semi-monthly, or 12 for monthly). Salaried employees who don't meet the exemption requirements are still owed overtime.
Jamie's example: $100,000 ÷ 12 = $8,333.33 gross pay per month.
Step 2: Subtract Pre-Tax Deductions
Subtract pre-tax contributions from gross pay to arrive at taxable wages. Common examples include 401(k) and 403(b) retirement contributions, health insurance premiums, HSA and FSA contributions, and qualified commuter benefits.
Not every pre-tax deduction reduces every tax. Traditional 401(k) and 403(b) contributions lower income tax wages but are still subject to Social Security, Medicare, and FUTA. Benefits offered through a Section 125 cafeteria plan, such as health premiums, FSAs, and payroll-deducted HSA contributions, typically reduce both income tax and FICA wages. Track the two wage figures separately so each tax is calculated on the right amount.
Jamie's example: Income tax wages are $8,333.33 − $500 = $7,833.33. Social Security, Medicare, and FUTA wages stay at the full $8,333.33.
Step 3: Withhold Federal Income Tax
Federal income tax withholding is based on the employee's Form W-4 and their taxable wages after pre-tax deductions. Most employers use the IRS percentage method or wage-bracket tables in Publication 15-T, or let payroll software handle it. The process works like this:
- Annualize the employee's taxable wages.
- Subtract the standard deduction for their filing status ($16,100 for single filers and $32,200 for married filing jointly in 2026), adjusted for any W-4 entries.
- Apply the current federal tax brackets to the result.
- Divide the annual tax by the number of pay periods to get the per-paycheck withholding.
Withholding is only an estimate of what the employee will owe. The final amount is settled when they file their tax return.
Jamie's example:
- Annualized taxable wages: $7,833.33 × 12 = $94,000
- Less the $16,100 standard deduction: $77,900
- Tax using the 2026 single brackets: $1,240 (10% on the first $12,400) + $4,560 (12% on the next $38,000) + $6,050 (22% on the $27,500 above $50,400) = $11,850
- Per paycheck: $11,850 ÷ 12 = $987.50 per month
Jamie's top bracket is 22%, but that rate applies only to income above $50,400, which is why the effective withholding is much lower than 22% of pay. Payroll software that uses Publication 15-T's percentage method will land close to this figure but may differ by a few dollars.
Step 4: Calculate FICA and FUTA Taxes
FICA covers Social Security and Medicare. Withhold 6.2% of wages for Social Security (up to the annual wage base, $184,500 in 2026) and 1.45% for Medicare (no cap) from the employee. The employer pays a matching 7.65%. Employees earning over $200,000 also owe an Additional Medicare Tax of 0.9%, which the employer withholds but does not match.
FUTA is paid by the employer only. The nominal rate is 6.0% on the first $7,000 of each employee's wages, but most employers receive a credit of up to 5.4% for paying state unemployment tax on time, bringing the effective rate to 0.6% (a maximum of $42 per employee per year). Employers in "credit reduction" states, which have unpaid federal unemployment loans, lose part of that credit and pay more. California is one of them.
Jamie's example:
- Social Security: 6.2% × $8,333.33 = $516.67 from Jamie, plus $516.67 from the employer
- Medicare: 1.45% × $8,333.33 = $120.83 from Jamie, plus $120.83 from the employer
- FUTA: The standard rate would be $42 per year, but California employers face a credit reduction. It was 1.2% for 2025, making the effective rate 1.8%. For 2026, California faces a potential 1.5% reduction, which would make the effective rate 2.1%, or $147 per year on the first $7,000 of Jamie's wages. The final 2026 rate isn't set until after November 10, 2026.
Jamie's first paycheck ($8,333.33) exceeds the $7,000 FUTA wage base, so the full FUTA liability is incurred in January. Payment follows the normal schedule: it's deposited with your quarterly FUTA deposit once your accumulated liability exceeds $500, or paid with Form 940 at year-end if it never does. Any credit reduction amount is treated as incurred in the fourth quarter and is due by January 31 of the following year.
Step 5: Calculate State and Local Taxes
Check whether your state or locality requires income tax withholding. Some states, such as Texas and Florida, have none, while others have flat or progressive rates, and some cities add their own taxes.
You'll also owe State Unemployment Tax (SUTA). In most states it's paid only by the employer, though a few require small employee contributions. Rates depend on your state and your company's claims history, and each state sets its own taxable wage base.
Jamie's example:
- California income tax: California doesn't tax 401(k) deferrals either. Jamie's annual taxable income is $100,000 − $6,000 (401(k)) − $5,706 (California standard deduction) = $88,294. Using California's most recent published rate schedule, the tax is $3,201.97 + 9.3% of the amount over $72,724, which comes to about $4,650 per year, or roughly $387.50 per month. California's small personal exemption credit would reduce this slightly. Actual withholding follows the EDD's tables, so treat this as an estimate.
- SUTA: New California employers pay 3.4% on the first $7,000 of wages, which is $238 per year.
- Employment Training Tax (ETT): California employers also pay 0.1% on the first $7,000, which is $7 per year.
Like FUTA, the SUTA and ETT wage bases are reached with Jamie's first paycheck, so the tax is incurred in January. SUTA and ETT are paid with your quarterly state return, generally due by the end of the month after each quarter.
Step 6: Calculate State SDI and PFML Contributions
Some states fund short-term disability insurance (SDI) or paid family and medical leave (PFML) through payroll contributions. Depending on the state, these are paid by the employee, the employer, or both, and rates and wage caps vary. California, New Jersey, New York, Washington, and Colorado are among the states with these programs. Check your state agency's current rates before running payroll.
Jamie's example: California SDI (which includes Paid Family Leave) is paid by the employee only, at 1.3% of all wages in 2026 with no wage cap: 1.3% × $8,333.33 = $108.33 per month.
Step 7: Withhold, Remit, and File
Once the calculations are done, withhold the taxes from the employee's paycheck, add the employer's share of FICA, FUTA, and state taxes, and remit everything on time. Federal deposits are typically made electronically through EFTPS on a monthly or semiweekly schedule, depending on your total tax liability.
Then file the required forms:
- Form 941 quarterly, reporting income tax withheld and FICA taxes
- Form 940 annually, for FUTA
- Forms W-2 and W-3 by January 31 (or the next business day), to employees and the Social Security Administration
- State and local returns as required
Withheld taxes are held in trust for the government, so late or missed deposits can lead to penalties, including personal liability for the responsible individuals.
Jamie's monthly paycheck:
| Employee Withholding | Amount |
|---|---|
| Federal income tax | $987.50 |
| Social Security (6.2%) | $516.67 |
| Medicare (1.45%) | $120.83 |
| California income tax (estimate) | $387.50 |
| California SDI (1.3%) | $108.33 |
| 401(k) contribution (pre-tax) | $500.00 |
| Total deductions | $2,620.83 |
| Net take-home pay | $5,712.50 |
Employer costs on top of Jamie's pay:
| Employer Tax | January | February–December (each month) |
|---|---|---|
| Social Security match (6.2%) | $516.67 | $516.67 |
| Medicare match (1.45%) | $120.83 | $120.83 |
| FUTA (2.1% projected) | $147.00 | $0 |
| California SUTA (3.4%) | $238.00 | $0 |
| California ETT (0.1%) | $7.00 | $0 |
| Total | $1,029.50 | $637.50 |
Over the year, that's about $8,042 in employer payroll taxes on top of Jamie's $100,000 salary. The table shows when each tax is incurred, not when it's paid, since SUTA, ETT, and FUTA are paid on quarterly or annual schedules.
That's a lot of manual math for just one employee, and it has to be repeated every pay period, with rates and wage bases that change every year. Multiply it across a whole team, and you can see why so many businesses automate the process.ed every pay period, with rates and wage bases that change every year. Multiply it across a whole team, and you can see why so many businesses automate the process.
Andrew Lokenauth, fractional CFO and finance expert, echoes this sentiment:
From handling $10M+ in annual payroll, I've developed a foolproof system. First, calculate gross wages. Then subtract pre-tax deductions like health insurance & 401k.
Pro tip: Use payroll software or the IRS withholding calculator. Manual math is asking for trouble.”
Essential Payroll Tax Forms And What They Do
Alongside your taxes, you also need to file the right forms with the right agencies, on time. Here's a breakdown of the core forms every employer needs to know, what they’re for, and when to file them.
1. Form W-2: Wage and tax statement
What it does: Reports wages paid and taxes withheld for each employee.
Who gets it: Employees, the Social Security Administration (SSA), and sometimes state tax agencies.
Due:
- To employees: By January 31
- To SSA (paper or e-file): By Jan 31
If you file late or file incorrectly, the penalty can be up to $310 per form, depending on how late you are.
2. Form W-3: Transmittal of wage and tax statements
What it does: A summary form that totals all W-2s being submitted to the SSA.
Who gets it: SSA (only when submitting paper W-2s).
Due: By Jan 31, same as W-2s.
3. Form 941: Employer’s quarterly federal tax return
What it does: Reports federal income tax withheld, plus Social Security and Medicare (FICA) taxes.
Who gets it: IRS
Due:
- Quarterly: April 30, July 31, Oct 31, Jan 31
- Even if no wages were paid that quarter, it still must be filed (unless you filed a final return).
If you’re a seasonal employer or hire infrequently, you can indicate that on the form to avoid unnecessary notices from the IRS.
4. Form 940: Employer’s annual federal unemployment (futa) tax return
What it does: Reports and pays FUTA tax, which funds federal unemployment benefits.
Who gets it: IRS
Due: Annually: By Jan 31
- You can deposit FUTA tax quarterly, but you only need to file once per year.
- If your total FUTA liability for the year is over $500, you must deposit it quarterly.
5. Form W-4: Employee’s withholding certificate
What it does: Used by employees to set federal income tax withholding amounts.
Who gets it: Employers keep it on file (not sent to IRS unless specifically requested).
Due: Upon hire, and whenever the employee updates it.
Tip: Always have a W-4 on file for each employee. If one isn’t submitted, you must withhold taxes as if the person were single with no adjustments.
6. State payroll tax forms
What they do: Varies by state. May include forms for income tax withholding, unemployment insurance, or disability programs (e.g., California DE 9/DE 9C for UI and SDI reporting).
Due: Usually quarterly or annually, depending on state rules.
Tip: Use your state’s employer tax portal or partner with a payroll provider who handles multi-state compliance.
7. Form 1099-NEC (if you hire contractors)
What it does: Reports payments of $600 or more made to independent contractors.
Due:
- To contractors: By January 31
- To IRS: By Jan 31 (paper or e-file)
What To Do If You’re Behind On Your Payroll Taxes
Falling behind on payroll taxes isn’t rare, but it can get serious fast. Whether it’s a cash flow crunch or oversight, the worst thing you can do is ignore it.
The IRS doesn’t just go after your business; in some cases, they’ll come after you personally.
So what should you do?
1. File everything, even if you can’t pay yet.
Don’t wait. The priority is to file all missing returns. Even if you don’t have the money right now, filing shows good faith and keeps penalties lower.
Lokenauth has gone through this ordeal, and here’s what he has to say:
“So this hits close to home. In my early consulting days, I inherited a client who hadn't paid payroll taxes for 6 months: about $175K behind.
First thing: File all missing returns immediately, even without payment. Then contact the IRS to set up an installment plan. They're pretty reasonable if you're proactive. We got them on a 24-month payment plan with minimal penalties.”
2. Get current, then get caught up
Don’t keep making the same mistake while trying to fix the old one. The IRS expects you to make current payroll deposits on time, even if you’re still paying off back taxes.
Raoul P.E. Schweicher, Managing Partner at MSadvisory, has over 8 years of experience in payroll management. He says:
“Make your current deposits on time so you're not digging a deeper hole. The penalty structure gets ugly fast: 2% for being 1–5 days late, jumps to 5% at 6 days, then 10% after 15 days. Miss an IRS notice by 10 days and you're looking at 15%.”
3. Set up a payment plan
If you’re upfront, the IRS will often allow a 24-month installment agreement for payroll tax debt.
This won’t wipe out penalties or interest, but it buys you time and protects you from enforced collections like levies or liens.
Schweicher adds:
“Payment plans are your friend if you can't pay everything at once—the IRS would rather get paid than chase you around. You can usually get 24 months for business payroll taxes. First-time penalty abatement is often available if you've got a clean history.”
4. Know the risks if you don’t act
If payroll taxes go unpaid long enough, the IRS can assess the Trust Fund Recovery Penalty - 100% of the unpaid portion, assessed personally against owners, officers, or anyone who “willfully” failed to send in the funds.
5. Get professional help early
Tax attorneys and payroll tax resolution specialists understand the system and can often negotiate better terms, reduce penalties, or even secure first-time abatement. Don’t wait until it spirals.
Common Payroll Tax Mistakes To Avoid
A few missteps can lead to significant problems. Here's what to watch out for:
- Late payments. Timeliness is key. Late payments are met with fees that increase the longer the payment is past due.
- Misclassification of employees. Freelancer or full-time? Your employee's classification affects their tax bracket, so ensure you get this right. According to Lokenauth, “Last March, one of my startup clients almost got hit with a $25K penalty because they misclassified contractors as employees. The thing is, classification issues are super common—I see them in about 30% of new clients.”
- Using outdated tax rates and tables. Using outdated tax rates, tables, or forms can result in incorrect calculations of payroll taxes. Always use the most current tax rates and tables provided by the IRS to ensure accuracy.
- Failure to account for taxable benefits. Forgetting to include taxable fringe benefits, such as bonuses, commissions, or non-cash compensation, in payroll calculations can lead to underreporting of income and underpayment of taxes.
- Overlooking employee withholding allowances. Neglecting to account for employee withholding allowances (essentially exceptions) or changes in filing status specified on Form W-4 can lead to incorrect federal income tax withholding amounts.
- Inaccurate calculation of overtime pay. Incorrectly calculating overtime pay rates for non-exempt employees can result in underpayment of wages and payroll taxes. Follow federal and state overtime pay rules and calculate overtime wages accurately.
- Failing to properly handle contractor tax forms: Mismanaging forms like Form 1096 and Form 1099 for U.S. contractors can lead to compliance issues and penalties. Ensure these forms are filed accurately and on time.
Avoiding common payroll tax mistakes is key to preventing legal issues. Tools like advanced tax software can help ensure compliance and accuracy in your payroll processes.
FAQs
Here are the answers to some of the most common payroll tax questions.
What happens if you don't pay payroll taxes?
The IRS imposes failure-to-deposit penalties ranging from 2% to 15% depending on how late the payment is, plus interest. More critically, unpaid trust fund taxes (the employee’s withheld share of FICA and income tax) can trigger the Trust Fund Recovery Penalty under IRC Section 6672, which holds responsible individuals personally liable for 100% of the unpaid amount.
How do you calculate payroll taxes by hand?
Multiply gross wages (after applicable pre-tax deductions) by 6.2% for Social Security and 1.45% for Medicare. The employer matches both amounts. Use the IRS withholding tables in Publication 15-T to determine federal income tax withholding based on the employee’s W-4 and filing status. Apply FUTA (0.6% on the first $7,000) and SUTA per your state’s rate and wage base.
What is the difference between payroll tax and self-employment tax?
Do payroll taxes apply to bonuses?
Yes. Bonuses are supplemental wages and are subject to FICA (Social Security and Medicare) and federal income tax withholding. Federal income tax on supplemental wages can be withheld at a flat 22% rate (37% for amounts exceeding $1 million in the calendar year) or aggregated with regular wages using the standard withholding tables.
How does payroll tax work for small business owners?
If you are an owner who receives W-2 wages from your own S corporation, payroll taxes are calculated the same as for any other employee — you pay the employee share, and the corporation pays the employer share. Sole proprietors and single-member LLC owners who are not on payroll pay self-employment tax on net business income instead. Partners in a partnership pay self-employment tax on their distributive share of partnership income.
The Importance of Being Diligent
Managing payroll taxes is a significant responsibility for employers. With potential legal and financial implications, it's vital to approach the task with diligence and accuracy.
By understanding the components, understanding which expenses the business can deduct, utilizing the right tools, and staying informed, you can ensure your business stays compliant and financially sound.
