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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