In 2020, an executive memo was released allowing employers to defer payroll taxes for employees. Employers who chose to defer deposits of their share of Social Security tax were required to pay 50% of the eligible deferred amount by December 31, 2021 and the remaining amount by December 31, 2022.
Additionally, IRS Notice 2020-65 allows employers to defer their employees’ share of Social Security taxes in 2020 as well. Although the repayment period ended on December 31, 2021, employers should have sent repayments to the IRS as they received them.
In both cases, employers that don’t repay the deferred amount on time will be subjected to penalty fees and interest on the unpaid balance. For more information on these matters.
Payroll taxes are taxes paid on wages or salaries that employees earn. Payroll taxes are paid by both employers and employees.
Employees can usually be distinguished from other types of workers, like independent contractors or self-employed individuals, based on the work, payment terms, and relationship they have with their employer. Generally, if you offer a worker employment benefits, withhold taxes from their paycheck, and set their work and payment terms, that person is considered an employee of your organization.
What’s the main difference between employee and employer payroll taxes?
Even though payroll taxes are paid by both employers and employees, there’s one major difference. Payroll taxes paid by employees affect employees’ net pay, but payroll taxes paid by employers don’t.
Keep in mind that payroll taxes are different from employment taxes, although they share some overlap.
Employment taxes include Medicare, Social Security, FUTA, and federal income taxes as well as Additional Medicare Taxes for eligible employees (more on these below). Although some may come from employee wages, employers automatically withhold and submit them to the Internal Revenue Service (IRS) on their behalf.
Meanwhile, payroll taxes are those that are taken out from an employee’s paycheck and matched by their employer—and more specifically, Social Security and Medicare taxes.
To put it one way, all payroll taxes are employment taxes but not all employment taxes are considered payroll taxes.
Payroll taxes that both employees and employers pay
Both employers and employees pay FICA tax, or Social Security and Medicare taxes, as a result of the Federal Insurance Contributions Act. It’s a 50-50 split.
Social Security tax
The 2022 Social Security tax is 12.4%. That’s 6.2% for employers and 6.2% employees.
This rate is applied to the first $147,000 your employee earns, so if your employee makes more than that amount in a calendar year, there won’t be any Social Security taxes withheld once they hit that wage base limit.
Medicare tax
The Medicare portion of the FICA tax is 2.9% of gross wages, and it’s applied to every dollar your employee earns. So for this tax, it’s 1.45% that you pay, and 1.45% that your employee pays.
Employer payroll taxes
Here are the taxes that only employers, not employees, pay when it comes to payroll.
Federal unemployment taxes (FUTA)
The Federal Unemployment Tax Act, or FUTA for short, is there to provide a buffer for people who have recently lost their jobs.
Employers have to pay 6% toward FUTA, though companies who pay their state unemployment taxes on time can receive a tax credit up to 5.4% towards their FUTA tax rate. After all is said and done, the FUTA tax rate usually equals 0.6% of all taxable wages—up to the first $7,000 earned for each employee.
State unemployment taxes
Just like FUTA, state unemployment insurance (SUI) taxes are paid by employers as a safety net for people who lost their job through no fault of their own and are actively looking for a new gig.
Nearly every state has a different tax rate, which is usually determined by the type of business you have and your history with unemployment claims. Head over to the US Department of Labor’s state law website to learn more about your particular rate.
Any local taxes
There are also a grab bag of taxes out there that are based on the city, county, or municipality that you work in. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site.
Employee payroll taxes
Federal income tax
This tax is paid by employees only and is calculated based on their total income, filing status, and personal exemptions. The 2022 federal tax rate is between 10% and 37%.
State income tax
New York and California typically have the highest rates, but it can vary by year. On the other end of the spectrum, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a personal income tax on wages. (Note: Tennessee does tax interest and dividend income.)
Any local taxes
There are also a grab bag of taxes out there that are based on the city, county, or municipality that you work in. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site.
Employee payroll taxes
Federal income tax
This tax is paid by employees only and is calculated based on their total income, filing status, and personal exemptions. The 2022 federal tax rate is between 10% and 37%.
State income tax
New York and California typically have the highest rates, but it can vary by year. On the other end of the spectrum, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a personal income tax on wages. (Note: Tennessee does tax interest and dividend income.)
Any local taxes
Once again, there may be local taxes at the city, county, or municipality level that employees may be responsible to pay.
Check with your local government or your payroll provider to ensure your payroll is compliant at the local, state, and federal levels.
Additional Medicare Tax
Okay, this last one is for the high earners.
If your employee makes more than $200,000, they are also subject to the Additional Medicare Tax. As the employer, you must withhold 0.9% of wages beyond $200,000.
Employer payroll tax payment and filing requirements
Every employer must pay their share of payroll taxes as well as the money they’ve withheld from their employees’ paychecks.
Companies must deposit these withholdings plus their own tax contributions to the IRS on a monthly or semi-weekly basis through the Electronic Federal Tax Payment System (EFTPS). Although the schedule you follow will depend on the kind of business you have, you can find out your deposit schedule and tax due dates with IRS Publication 15.
In addition to withholding and depositing payroll taxes, employers must file Form 941 every quarter. Every year, they must also file Form 940 and Form 945, as well as Forms W-2 for every employee.
Your small business may also need to deposit withholdings and file reports or tax statements with your state and local government agencies, depending on their requirements.