Payroll taxes for employers
How employers work out payroll taxes
Every paycheck runs in two directions. Some taxes come out of what the employee earns, and others the business pays on top of the wages. Read each tax across both sides and the sum starts to make sense.
Paycheck against business
What comes out of the paycheck, and what the business adds
The same wages sit behind both columns. What differs is whose money each tax is.
Gross wages
The starting point for the pay period, before anything is taken out of it.
The base most of the business’s own payroll taxes are worked out on.
Social Security and Medicare
Withheld from each paycheck as the employee’s share.
The business pays a matching share from its own funds, on top of the wages.
Income tax withholding
Federal and state income tax come out of pay, guided by the withholding forms the employee completes.
Costs the business nothing of its own, but the business is responsible for taking it out and sending it in.
Unemployment taxes
Usually nothing, though some states also take a contribution from employees.
FUTA and SUTA are mainly a cost of employing people, paid by the business.
The bottom line
Net pay: what reaches the employee after withholding and other deductions.
The full cost of the job: wages plus the employer’s taxes and other payroll costs.
A pay run, in order
How the sum is worked out for one pay period
The order stays much the same, on paper, in a spreadsheet or in payroll software.
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Gross pay
Add up salary or hours, overtime, bonuses and tips for the period.
Starting point -
Pre-tax deductions
Some benefit contributions come off before certain taxes are worked out, which changes the amount those taxes apply to.
Employee side -
Withholding
Work out Social Security, Medicare and income tax for this employee, from their pay and their withholding forms.
Employee side -
Net pay
Take the withholding and any remaining deductions away from gross pay. What is left goes to the employee.
Employee side -
Employer taxes
Add the matching Social Security and Medicare share, then FUTA and SUTA, none of which comes out of the paycheck.
Employer side -
Deposits and reports
Send both sides’ money to the agencies that collect it, report the wages and taxes, and keep the records.
Employer side
Who is on the chart
Not everyone paid by a business has two sides
How someone is classified decides whether any of this applies to their pay.
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Employees
Both columns apply. The business withholds from their pay and adds its own share.
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Independent contractors
The business generally withholds nothing and pays no employer share. The contractor handles their own tax.
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Owners on payroll
An owner paid wages by their own corporation sits on both sides of the chart at once, as employee and as employer.
Look-up table
The payroll taxes, by name
Payroll paperwork tends to use the short names, so here is what each one refers to.
Additional Medicare Tax
An extra Medicare charge on higher wages, on top of the regular Medicare tax.
Employee sideFederal income tax withholding
Money taken from pay in advance of the employee’s own yearly income tax bill.
Employee sideFICA
The Federal Insurance Contributions Act. The usual name for Social Security and Medicare taken together.
Both sidesFUTA
The federal unemployment tax, which helps pay for unemployment programs.
Employer sideLocal payroll taxes
Charges set by some cities, counties and school districts, on top of the federal and state ones.
Varies by placeMedicare
The tax that funds hospital insurance, charged on wages alongside Social Security.
Both sidesSocial Security
The tax that funds retirement, disability and survivor benefits.
Both sidesState income tax withholding
The state version of income tax withholding, in states that tax wages.
Employee sideSUTA
State unemployment tax, also known as SUI or, in some states, reemployment tax.
Mainly employer side