Payroll Tax
Taxes levied on wages and salaries, split between employee withholding and employer contributions, funding social programs like Social Security and Medicare.
Payroll taxes are taxes assessed on compensation paid to employees, comprising both amounts withheld from employees' paychecks and separate contributions made by the employer on top of wages. In the United States, the primary federal payroll taxes are FICA taxes — funding Social Security (6.2% employee, 6.2% employer, on wages up to the annual wage base) and Medicare (1.45% each, with an additional 0.9% employee-only surcharge on wages above $200,000).
Beyond FICA, employers must withhold federal income tax (based on the employee's Form W-4), and in most states, state income tax. Employers additionally pay Federal Unemployment Tax (FUTA, 6% on the first $7,000 of wages, with credits for state unemployment tax paid) and State Unemployment Tax (SUTA, rates vary by state and employer experience rating).
Payroll tax compliance is among the most heavily enforced areas of US tax law. The IRS holds business owners personally liable for unpaid payroll taxes through the Trust Fund Recovery Penalty — penalties can be assessed against any person responsible for collecting and remitting withholding taxes who willfully fails to do so. This personal liability is not dischargeable in bankruptcy.
Deposit schedules — how frequently payroll taxes must be remitted to the IRS — depend on the employer's total payroll tax liability. Semi-weekly depositors (those with over $50,000 in lookback period taxes) must deposit within days of each payroll. Monthly depositors remit by the 15th of the following month. New employers start as monthly depositors.
Payroll software like Gusto, ADP, and Paychex automate payroll tax calculation, withholding, deposits, and year-end forms (W-2, 940, 941) to minimize compliance risk.
FAQs
Who pays payroll taxes — the employer or employee?
Both. Employees pay their share through withholding from their paycheck (employee Social Security, Medicare, and income tax). Employers separately pay their matching share of Social Security and Medicare, plus FUTA and SUTA. The employer's portion is a cost on top of wages — not deducted from employee pay.
What happens if a company misses a payroll tax deposit?
Failure-to-deposit penalties range from 2% for deposits 1–5 days late up to 15% for amounts not deposited more than 10 days after the first IRS notice. Intentional non-payment can result in the Trust Fund Recovery Penalty, holding responsible individuals personally liable for 100% of unpaid withholding taxes.
Do payroll taxes apply to independent contractors?
No — employers do not withhold or match payroll taxes for 1099 independent contractors. However, contractors pay self-employment tax (15.3% on net earnings) covering both the employer and employee shares of Social Security and Medicare. Misclassifying employees as contractors to avoid payroll taxes is a major compliance risk.
Related Terms
W-2 Employee
A traditional full-time or part-time employee whose taxes are withheld by the employer, documented annually on IRS Form W-2.
1099 Contractor
A self-employed independent contractor who provides services to a business without being classified as an employee.
Employer of Record
A third-party company that legally employs workers on behalf of another business, managing payroll, taxes, and compliance across jurisdictions.
Benefits Administration
The management of employee benefits programs including health insurance, retirement plans, PTO, and other compensation components.
