Every time your small business pays an employee, you’re responsible for issuing an accurate paycheck and properly withholding, paying and reporting various payroll taxes. Understanding these obligations can help you manage cash flow, maintain compliance and avoid costly surprises. Here are the payroll tax fundamentals every employer should know.
Federal, state and local taxes
Employers generally must withhold federal income tax from employees’ paychecks. The amount withheld depends primarily on two factors: (1) the employee’s wages and (2) the information provided on Form W-4, “Employee’s Withholding Certificate.” Additional withholding rules may apply to commissions, bonuses and other forms of compensation.
Don’t overlook your nonfederal payroll tax obligations. Many states require employers to withhold state income tax, although nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — don’t impose an individual income tax on wages. Certain local jurisdictions also impose income taxes. In some locations, employers may be required to withhold taxes or contributions that fund programs such as short-term disability, paid family leave or unemployment benefits.
FICA taxes
Payroll taxes imposed under the Federal Insurance Contributions Act (FICA) consist of two components:
- Social Security tax. The Old Age, Survivors and Disability Insurance (OASDI) portion is taxed at 6.2% on wages up to the annual wage base, which is $184,500 for 2026.
- Medicare tax. The Hospital Insurance (HI) portion is taxed at 1.45% on all wages, with no wage base.
Both employers and employees are responsible for paying FICA taxes, with employers generally required to withhold the employee’s share from each paycheck. Once an employee’s wages from your business reach the Social Security wage base, you can generally stop withholding and paying Social Security tax for that employee for the remainder of the year. The wage base resets at the beginning of the next calendar year.
Additional Medicare tax
Employees may be subject to a 0.9% Additional Medicare Tax when their applicable wages, along with certain other income, exceed the following thresholds:
- $200,000 for single filers,
- $250,000 for married couples filing jointly, and
- $125,000 for married couples filing separately.
These thresholds were established by the Affordable Care Act and aren’t adjusted annually.
The Additional Medicare Tax is paid by employees only, so employers don’t match it. However, employers must begin withholding the additional 0.9% in the pay period when an employee’s wages exceed $200,000 during the calendar year, regardless of the employee’s filing status.
Unemployment taxes
The Federal Unemployment Tax Act (FUTA) imposes an employer-paid tax that generally applies to the first $7,000 of each employee’s annual wages. FUTA helps fund state unemployment programs that provide benefits to eligible workers who lose their jobs involuntarily.
The basic FUTA tax rate is 6%, but employers may qualify for a credit of up to 5.4% for state unemployment taxes paid, resulting in an effective rate of 0.6%. The credit may be reduced if a state has outstanding federal unemployment loans.
You should also be aware of your potential obligations under a State Unemployment Tax Act (SUTA). Every state operates its own unemployment insurance program to provide benefits to eligible workers who are involuntarily separated from their jobs.
An employer’s SUTA rate may be based partly on its claims experience, although the formulas vary by state. New businesses generally are assigned special rates. States typically notify employers of their applicable rates annually, so watch for these notices and review them carefully.
Stay in compliance
When considering your small business’s tax burden, you might immediately think of income taxes. But if you have employees, payroll taxes should also be a priority.
Your business is responsible for accurately calculating, paying, depositing and reporting applicable payroll taxes, including amounts withheld from employees’ wages and employer-paid taxes. Mistakes can result in penalties, interest and unexpected cash flow challenges.
Contact us for help identifying your payroll tax obligations, reviewing your processes and developing practices that can help keep your business in compliance.
