What Are Payroll Taxes? | Types, Employer Obligations, & More

What Are Payroll Taxes?

This article has been updated to include 2022 tax information.

As an employer, you need to withhold several employment taxes and insurances from employee paychecks. If you’re self-employed, you have to pay employment taxes, too. Payroll taxes are some of the required employment tax withholdings.

So, what are payroll taxes, and how much do you need to withhold?

What are payroll taxes?

Payroll taxes consist of Social Security and Medicare taxes. Social Security tax funds benefits for retirement, dependents of retired workers, and the disabled and their dependents. Medicare tax funds medical benefits for people once they reach age 65. Together, these taxes are called FICA (Federal Insurance Contributions Act) tax.

You will withhold half of the FICA tax from employee wages. The other half are employer payroll taxes that you pay.

Self-employed individuals also have to pay federal payroll taxes. Instead of paying FICA tax, you have to pay self-employment tax.

Payroll tax vs. income tax

People frequently use the term “payroll tax” to refer to all employment taxes. But, there are many types of employment taxes.

There are income taxes. The federal government imposes a federal income tax, and some states and localities have income taxes, too. Income taxes only come out of employee wages. You do not contribute toward income taxes.

Other taxes

There are also unemployment taxes. You, as the employer, have to pay federal unemployment tax (FUTA tax) and state unemployment tax (sometimes called SUTA tax or state unemployment insurance).

Payroll tax rates

Employees and employers pay the same amount for FICA payroll taxes. And, self-employed people have a different tax rate. How much are payroll taxes for employees, employers, and self-employed individuals?

Social Security and Medicare tax rates

To find out how much FICA tax to pay, let’s break it down into two parts: Social Security and Medicare taxes.

Social Security tax is a flat rate of 12.4% and only applies to the first $142,800 an employee earns in 2021 (increasing to $147,000 in 2022). The tax is equally divided between you and the employee. You will pay 6.2% of Social Security tax. You will also withhold 6.2% of the employee’s wages.

Medicare tax is 2.9%. Once again, Medicare tax is equally paid by you and your employee. You will pay 1.45% and withhold 1.45% from your employee’s wages. There is not a cap on wages subject to Medicare tax. An employee will owe an additional Medicare tax of 0.9% on wages more than $250,000 if married filing jointly, $125,000 if married filing separate, or $200,000 for everyone else.

graphic showing the FICA tax breakdown

Self-employment tax rate

Self-employed people have to pay self-employment tax instead of FICA tax. Self-employment tax is also known as the Self-Employment Contributions Act (SECA) tax. SECA tax is basically the same as FICA tax.

SECA tax is a flat rate of 15.3% on the first $142,800 you earn in 2021. Of that total, 12.4% goes to Social Security tax and 2.9% goes to Medicare tax. For wages beyond the Social Security wage base, only the Medicare portion of the tax applies.

Self-employment wages are also subject to additional Medicare tax if the wages are more than $250,000 if married filing jointly, $125,000 if married filing separate, or $200,000 for everyone else.

You can make payroll taxes easier. When you use Patriot’s Full Service Payroll software, Patriot will calculate, withhold, and remit payroll taxes for you. Start your free trial today.

This article is updated from its original publication date of 10/20/2015.

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