Paying employees involves more than issuing accurate paychecks. Small-business employers must also calculate, withhold, deposit, pay, and report several federal, state, and local taxes. Understanding these responsibilities can help protect cash flow, reduce compliance risk, and prevent penalties and interest.
Federal, State, and Local Payroll Tax Withholding
Employers generally must withhold federal income tax from employee wages. The amount withheld depends primarily on:
- The employee’s taxable wages for the pay period
- The information the employee provides on Form W-4, Employee’s Withholding Certificate
Different withholding rules may apply to bonuses, commissions, and other supplemental wages.
State and local requirements also deserve close attention. Many states require income tax withholding, while some do not tax individual wage income. Certain cities, counties, and other local jurisdictions impose their own income or payroll taxes. Depending on where employees work, an employer may also need to withhold or contribute toward programs such as paid family leave, short-term disability, or unemployment insurance.
Because rules differ by jurisdiction and can change, employers should review their payroll setup whenever they hire in a new location or an employee changes work locations.
Understanding FICA Taxes
The Federal Insurance Contributions Act, commonly known as FICA, covers Social Security and Medicare taxes. Employers generally withhold the employee’s share and pay a matching employer share.
Social Security Tax
For 2026, the Social Security tax rate is 6.2% for employees and 6.2% for employers. The tax applies to wages up to the annual Social Security wage base of $184,500.
Once an employee’s wages from the business reach the annual wage base, the employer generally stops withholding and matching Social Security tax for that employee for the rest of the calendar year. The wage base resets at the beginning of the next year.
Medicare Tax
The regular Medicare tax rate is 1.45% for employees and 1.45% for employers. Unlike Social Security tax, Medicare tax has no annual wage limit. Covered wages remain subject to the tax regardless of the employee’s earnings.
Additional Medicare Tax
Some employees may owe an additional 0.9% Medicare tax when applicable wages and other compensation exceed thresholds based on filing status:
- $200,000 for single filers
- $250,000 for married couples filing jointly
- $125,000 for married couples filing separately
The employee alone pays this additional tax. Employers do not match it.
However, an employer must begin withholding the additional 0.9% tax when wages paid to an employee exceed $200,000 during the calendar year, regardless of the employee’s filing status. This employer withholding trigger may differ from the employee’s final tax liability, which is reconciled on the employee’s individual income tax return.
Federal and State Unemployment Taxes
FUTA
The Federal Unemployment Tax Act, or FUTA, generally requires employers to pay federal unemployment tax on the first $7,000 of each employee’s annual wages. FUTA is paid by the employer and is not withheld from employee pay.
The standard FUTA rate is 6%. Eligible employers may receive a credit of up to 5.4% for timely state unemployment tax payments, resulting in an effective federal rate of 0.6%. The available credit may be lower for employers in a FUTA credit reduction state.
SUTA
Employers may also owe tax under a State Unemployment Tax Act, often called SUTA or state unemployment insurance tax. Each state establishes its own taxable wage base, rates, filing rules, and payment schedule.
An employer’s state unemployment rate may depend on factors such as its industry, claims history, and length of time in business. New employers frequently receive a standard new-employer rate. Businesses should review the annual rate notice issued by each applicable state and promptly address any discrepancies.
Practical Steps for Payroll Tax Compliance
A reliable payroll process should help the business:
- Classify workers correctly as employees or independent contractors
- Collect and maintain current withholding forms
- Apply the correct federal, state, and local tax rules
- Track annual wage bases and withholding thresholds
- Deposit payroll taxes by the required deadlines
- File accurate payroll tax returns and information forms
- Reconcile payroll records to tax filings and the general ledger
- Monitor notices, annual rate changes, and new work locations
Payroll errors can create penalties, interest, amended returns, employee frustration, and unexpected cash flow demands. Periodic reviews of payroll procedures and system settings can help identify problems before they become costly.
Keep Your Payroll Practices on Track
Payroll tax compliance is an ongoing responsibility. Rates, wage bases, employee information, and state requirements may change from year to year. A proactive review can help ensure your business is withholding the correct amounts, making timely deposits, and reporting payroll taxes accurately.
Contact us if you need help identifying your payroll tax obligations or reviewing your current payroll procedures.
Frequently Asked Questions
What payroll taxes do small-business employers generally pay?
Small-business employers may be responsible for federal income tax withholding, Social Security and Medicare taxes, federal unemployment tax, and applicable state or local taxes. Requirements vary based on the business and the locations where employees work.
What are the Social Security and Medicare tax rates for 2026?
For 2026, the Social Security tax rate is 6.2% for the employee and 6.2% for the employer on wages up to $184,500. The regular Medicare tax rate is 1.45% for each, with no wage limit.
When must an employer withhold Additional Medicare Tax?
An employer must begin withholding the 0.9% Additional Medicare Tax when an employee’s wages exceed $200,000 in a calendar year. The employer does not match this additional tax.
Is FUTA tax deducted from employee paychecks?
No. FUTA is an employer-paid tax and is not deducted from employee wages. It generally applies to the first $7,000 of each employee’s annual wages, subject to applicable rules and credits.
How often should a business review its payroll tax setup?
A business should review its payroll setup at least annually and whenever it hires in a new jurisdiction, receives a new state unemployment rate, changes payroll providers, or learns that an employee has changed work locations.
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