The Payroll Playbook: Which Payroll Taxes are Paid by Employers

“Who’s FICA? And why is he taking all of my money?” — Rachel Green and every newbie looking at their first paycheck. Turns out FICA isn’t a guy; it’s the Federal Insurance Contributions Act. And everybody who earns a paycheck, whether through wages, salary, or tips (yes, tips count too) contributes a portion of their pay to FICA to fund federal social programs. Is it a total bummer to not receive that pre-tax total? Sure. But taxes are just part of having a job in America, so pay we must. Hold on. Aren’t you curious about exactly where your hard-earned money is going and who is responsible for paying for what? We figured as much. So we’re going to slice through the confusion and make it as easy as pie. And speaking of pie...

What are payroll taxes?

Think of your paycheck as a giant pizza. Payroll taxes are basically a slice of your paycheck set aside for the government. Taken as a percentage of your earnings, this money goes to fund things like Social Security, Medicare, and unemployment benefits—you know, those safety nets we all hope we never need, but sure are glad they’re there when we do. Now, employees and employers share the burden when it comes to taxes. Employers are on the hook for some, employees are on the hook for others, and some taxes require a slice of both pies. Although most of us would prefer to keep the pie all to ourselves, sharing is about more than caring, it’s the law—so we might as well learn how to dish it out correctly.

What’s the main difference between employer and employee payroll taxes?

Employers and employees share the burden of certain taxes and deal with others on their own. The main difference is how they're collected. Employee payroll taxes are essentially slices that employers take from your paycheck pizza (through direct deductions) before it’s delivered to you. This pays for programs like Social Security, Medicare, and others (depending on where you live). The good news is that this is a shared burden between employers and employees. So, when employers deliver those employee payroll slices (taxes) to the government, they have to dish out extra slices of their own pie too.

Payroll taxes that both employers and employees pay

You’re probably wondering what exactly your tax dollars are paying for, and rightfully so. Let's start by breaking down a couple of taxes that employers and employees handle together, both of which fall under the umbrella of our favorite guy: FICA. Both employers and employees contribute equally to taxes under the Federal Insurance Contributions Act (FICA), supporting the following federal programs:

Social security tax

Social Security tax is basically a financial safety net for retired Americans. It funds things like retirement, disability, survivor benefits, and supplemental security income for eligible Americans.

Medicare tax

As people get older, health becomes really important, and Medicare makes sure seniors can get the medical care they need. It's a way to support them during a time when health needs often increase. The truth is, no one is immune to aging or illness, and these programs provide the financial support needed to get through some of life's toughest moments. So, as much as we’d like the whole pizza, it’s pretty hard to argue with that.

Payroll taxes that are paid by employers

When it comes to payroll taxes, employers have the financial responsibility to chip in and support the community, ensuring the following vital programs keep rolling.

Federal unemployment taxes (FUTA)

This tax is essentially a form of insurance that helps support employees who become unemployed through no fault of their own. Employers typically have to pay a 6% FUTA on the first $7,000 of each employee’s wages, but you can get a tax credit up to 5.4% if you pay on time. So it definitely pays to be organized!

State unemployment taxes

On the state level, employers also chip in for unemployment benefits to ensure financial assistance is available to workers (within their state) when needed.

Any local taxes

Depending on where you live, there might be a few extra taxes for employers to think about. Local taxes fund programs and services (like education and garbage collection) right in your neighborhood, giving businesses a chance to give back to the community that supports them. These taxes are a way to actively contribute to the welfare of your employees and the local community, creating a positive impact where you work and live.

Payroll taxes that are paid by employees

We already know that FICA takes a slice from everyone’s paycheck (to pay for Medicare and Social Security). But what else are employees on the hook for?

Federal income tax

Employers deduct this chunk of taxes from employee paychecks to fund vital federal programs like National Defense, infrastructure, education, and law enforcement. Your federal income tax rate can vary from 10% up to 37%, depending on your gross annual income.

State income taxes

Depending on your state of residence, a portion of your earnings may be earmarked for state income taxes too. State taxes keep your community running smoothly by providing financial support for things like education, healthcare, and public safety.

Any local taxes

But wait, there’s more! Sometimes you get the pleasure of paying local taxes too. These taxes pay for local programs and services like parks, libraries, emergency services, and public transportation—directly impacting the quality of life in your community. Understandably, we all want our paychecks to be bigger, but chipping in a bit to fund programs that benefit society's well-being and development doesn't sound too bad, does it?

Everything you need to know about filing employer payroll taxes

While it may be tempting to bury your head in the sand in hopes that the mythical tax fairy will rescue you from the complexities of payroll taxes, we recommend a more proactive approach: staying organized. Although not quite as glamorous as a mythical tax fairy, organization is essential for small businesses, particularly those dealing with quarterly taxes. Why? Well, as the boss, it’s on you to handle both your share of payroll taxes and the funds collected from your team's paychecks. This process requires a lot of paperwork and even more organization. To report wages and taxes, you need to complete Form 941, every quarter. Then annually, you’ll complete Form 940 for federal unemployment tax and distribute W-2 forms to your team. Now, remember those taxes you withheld from your team’s paychecks? Well, the IRS doesn’t want you keeping those until tax time, so you’ll have to make regular tax deposits (including your share) to the IRS. These deposits are required either monthly or bi-weekly, depending on your total tax liability. Don’t forget to check your state and local tax regulations too—you might be on the hook for a bit more dough. Not exactly an organizational guru like Marie Kondo? No worries. Homebase automates everything, from timesheets to payroll and even taxes. So, you can confidently take a hands-off approach to the tediousness of payroll taxes.

How to calculate employer payroll taxes

Now that you’ve got a handle on the process of filing employer payroll taxes, it’s time to break down those calculations. Because the IRS is nothing if not accurate.

Step 1: Determine tax liabilities

Your business structure affects what taxes you pay and when. To prevent errors, make sure you know whether your business is a partnership, corporation, or LLC before going any further. If you don’t already have one, get an Employer Identification Number (EIN). You’ll need this for tax purposes. Determine which taxes (federal, state, and local) apply for your business and their filing deadlines, to ensure you don’t face any late penalties. Don’t forget that small businesses typically have to file their federal taxes quarterly (rather than annually), so you get to do this process 4 times a year.

Step 2: Determine gross wages for your team

Gather employee information like Social Security numbers, filing statuses, and relevant tax forms (like W-4s). Determine the total gross pay for each employee. This includes regular wages, bonuses, overtime pay, and any other forms of compensation (like tips). Subtract pre-tax deductions from their gross pay. Common pre-tax deductions include health insurance and retirement plan contributions. Once you’ve subtracted pre-tax deductions, you’ll be left with the taxable income for each employee. This is the amount subject to various taxes.

Step 3: Calculate employee and employer tax withholdings

Using your employees’ W-4 forms and IRS withholding tables, calculate federal income tax, Social Security, and Medicare tax withholdings for each employee. Then, determine your share of Social Security and Medicare taxes: Social Security tax is 6.2% of the employee’s gross wages (up to a certain limit), while Medicare tax is 1.45% of the total gross wages. Depending on where you live, there may be additional state unemployment or local taxes to calculate at this stage too.

Step 4: Calculate net pay

To calculate the net pay for each employee, subtract all withholdings and employer contributions from their gross wages.

Step 5: Complete tax forms and submit payments

Use the following forms to file quarterly and annual tax reports:

• Form 941 (Employer's Quarterly Federal Tax Return): Filed every quarter, this form reports the federal income tax, Social Security, and Medicare taxes that were withheld.
• Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return): This is an annual report on the federal unemployment tax that employers need to file.
• W-2 forms: Given to employees by January 31 each year, this form summarizes their yearly earnings and tax withholdings.
• W-3 form: This is a summary form for all W-2s sent to Social Security.

Submit payments for the taxes you’ve withheld, along with your employer contributions to the right tax folks (federal, state, local) by the deadlines to steer clear of any penalties.

Step 6: State and local reporting

Review your state and local regulations to ensure compliance with tax requirements. This might include completing extra forms and submitting separate payments to your state and local tax authorities.

Step 7: Stay on top of things

Stay informed about changes in tax laws. Make sure you're updating employee forms as needed, especially the W-4 for adjusting withholding. Exhausted even thinking about doing that four times a year? We don’t blame ya! Even writing out the process was tiring. Luckily, there’s a way to automate the whole process and eliminate manual calculations (and paperwork) once and for all.

Automate payroll taxes with Homebase

Let’s be honest, even individual taxes are a lot to manage, let alone handling payroll taxes for an entire business. Homebase takes taxes completely off your plate by automating the entire payroll process, from calculations to filing. It all begins with our user-friendly time clock app—which is totally free, by the way. As your team punches in and out for their shifts (directly from their phones), Homebase calculates hours, breaks, overtime, bonuses, commissions, and even tips. The tedious task of converting timesheets into hours and payroll? Consider it done. Homebase automatically calculates wages and taxes seamlessly, and the best part? You can choose to send payments via direct deposits or opt for the classic check printing—whatever suits your style. But Homebase is about more than simple convenience; we're payroll experts too. Tax filings, 1099s, W-2s, it's all in a day's work for us. We’ll even send payments to the state and the IRS, without a single click from you. And, if there are any changes in federal or state tax laws, we'll shoot you a notification, keeping you on the straight and narrow. With simple, automatic filing Homebase payroll can help you keep your tax responsibilities straight. Get started.