As a business owner, you know that running payroll involves
much more than just compensating employees. Every paycheck represents a complex
web of tax obligations that your company must handle accurately and
consistently.
Indeed, staying compliant with payroll tax rules is
essential to maintaining your business’s reputation and avoiding costly
penalties. That’s why it’s essential to regularly review your key payroll tax
responsibilities to ensure nothing falls through the cracks.
Federal, state and local
Let’s start with the big ones. As you’re well aware,
employers must withhold federal income tax from employees’ paychecks. The
amount withheld from each person’s pay depends on two factors: 1) the wage
amount, and 2) information provided on the employee’s Form W-4,
“Employee’s Withholding Certificate.” Additional withholding rules may apply to
commissions and other forms of compensation.
Be sure to stay apprised of your non-federal payroll tax
obligations. State income tax withholding rules, for example, apply to many
employers. However, nine states have no income tax: Alaska, Florida, Nevada,
New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Certain localities also impose income taxes. And in some
places, withholding is required to cover short-term disability, paid family
leave or unemployment benefits.
FICA and FUTA
Many an accounting or HR staffer has had to repeatedly
explain what these two abbreviations mean. The first one stands for the Federal
Insurance Contributions Act (FICA). Under this law, payroll taxes consist of
two individual taxes.
First is Social Security tax, which is 6.2% of wages up to
an annually inflation-adjusted wage base limit. For 2025, that limit is
$176,100 (up from $168,600 in 2024). Both the employee and employer pay 6.2% up
to that amount, meaning the business withholds the employee’s share and
contributes a matching amount for a total of 12.4%The second is Medicare tax,
which is 1.45% of all wages, with no wage base cap. Again, both the employee
and employer pay the percentage for a total of 2.9%.
The other abbreviation stands for the Federal Unemployment
Tax Act (FUTA). Under it, employers must pay 6% on the first $7,000 of each
employee’s annual wages, before any credit. In many cases, if state
unemployment taxes are paid fully and on time, the business can receive a
credit of up to 5.4%, yielding an effective rate of 0.6%.
Be aware that certain states with outstanding federal
unemployment-trust-fund loans may not qualify for the full credit, so employers
could face higher effective FUTA rates in those jurisdictions. FUTA taxes are
paid only by the employer, so you shouldn’t withhold them from
employees’ wages.
Additional Medicare tax
This payroll tax often flies under the radar. Under a
provision of the Affordable Care Act, an additional Medicare tax of 0.9%
applies to employee wages above:
- $200,000
for single filers,
- $250,000
for married couples filing jointly, and
- $125,000
for married couples filing separately.
Only employees pay this tax. However, employers are
responsible for withholding it once an employee’s wages exceed $200,000 — even
if the employee ultimately may not owe it (for example, for joint filers).
State unemployment insurance
Every state also runs its own unemployment insurance program
to provide benefits to eligible workers who are involuntarily terminated. State
unemployment obligations vary widely in terms of wage base, rate and employer
vs. employee contributions.
Generally, the rate employers must pay is based on their
experience rating. The more claims made by former employees, the higher the tax
rate. States update these rates annually.
Get stronger
Managing payroll taxes can be complex — especially as rates
and rules may change from year to year. But you can confidently meet your
compliance requirements with the right system, procedures, employees and
professional guidance in place. We’d be happy to review your current approach,
flag potential risks and recommend ways to strengthen your payroll tax
processes. Contact us for more information.
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