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An all-in-one guide to paying federal and state payroll taxes in the U.S.
As you’ve probably learned by now, taxes are an inevitable part of doing business in the United States. While most focus generally lies on federal and state income taxes, there’s also a third aspect—payroll taxes.
What are payroll taxes?
Payroll taxes are taxes on an employee’s gross salary. The revenues from payroll taxes are used to fund public programs; as such, the funds collected go directly to those programs instead of the Internal Revenue Service (IRS).
Even if you’re self-employed with no additional employees, you’re still required to remit payroll taxes on your own salary.
There are 3 categories of federal payroll taxes:
- Social Security. This tax funds the federal retirement program for U.S. citizens. The rate is currently 12.4% of gross wages up to $160,200/year (as of 2023).
- Medicare. This program provides federal insurance for citizens aged 65 and over, as well as younger people with certain disabilities. This tax is currently taken out at 2.9% of gross wages (with no wage maximum). Note that there is an additional 0.9% tax for high-income earners—married taxpayers who make over $250,000 or single taxpayers making over $200,000. There is no employer match for this added tax.
- Federal Unemployment Tax Act (FUTA). Revenues from this tax go toward federal and state unemployment funds to help workers who have lost their jobs. The rate is 6% of the first $7,000/year of gross wages. However, businesses that pay this tax fully and on time receive a 5.4% credit, which lowers their FUTA tax responsibility to 0.6%.
These taxes are listed on an employee’s pay stub, with the first two shown as FICA (Federal Insurance Contributions Act).
As an employer, you’re responsible for half of the FICA tax amounts for each employee. The remaining half comes from the employees themselves.
If you’re self-employed, however, you’ll need to pay the full 15.3% of FICA taxes due on your salary. FUTA taxes are paid entirely by the employer; there is no employee payment.
How are federal payroll taxes paid?
How your federal payroll taxes are paid depends on the type of tax. Your company withholds FICA taxes (along with their federal income taxes) from your employees’ paychecks. You’ll then transfer these funds, along with your own contributions, via the Electronic Federal Tax Payment System (EFTPS).
Your deposits must be made either on a monthly or semi-weekly schedule—an election you make before each calendar year.
- Monthly payments. A monthly payment must be made by the 15th of the following month.
- Semi-weekly payments. Every other week deposit dates depend on your pay schedule. If your payday falls on a Wednesday, Thursday or Friday, your deposit is due Wednesday of the following week. If you pay on any other day, it’s due the Friday of the following week.
FUTA taxes are handled differently. Your company pays these taxes entirely, so nothing is withheld from employee paychecks. This payment must be deposited quarterly to the EFTPS by the last day of the month after the end of each quarter.
However, if your quarterly total amount is less than $500, you can carry it forward to the next quarter. (This carryover can continue over multiple successive quarters if your total amount stays under this threshold. Once you exceed it, your payment must be made by the next applicable due date.)
Penalties for late payroll tax payments
Failure to remit payroll taxes on time can result in serious consequences. Financial penalty amounts depend on the circumstances:
- 2% penalty assessed if your deposit is 1-5 days late
- 5% penalty assessed if your deposit is 6-15 days late
- 10% penalty assessed if you’re more than 15 days late but before 10 days after the date of your first IRS notice
- 10% penalty assessed if deposits were instead paid directly to the IRS or with your tax return
- 15% penalty assessed if any amount is unpaid more than 10 days after the date of your first IRS notice (or the day you receive a notice requiring immediate payment)
Note that you aren’t the only one affected by late payroll tax payments. Your employees could lose future Social Security, Medicare, or unemployment benefits if those funds aren’t paid. So take care of your obligations—and your employees—by making complete payroll tax payments on time.
Don’t forget reporting requirements
Collection and payment aren’t your only tax responsibilities. You’ll also have to report these amounts (and other information) regularly to the IRS.
For FICA tax (as well as federal income tax), you must complete and file Form 941, Employer’s Quarterly Federal Tax Return. This form is due by the last day of the month following the end of each quarter, although some employers might be considered annual filers.
Note that depending on the type of business you run, you might file an alternate form. For example, a farm uses Form 943 instead of Form 941.
FUTA taxes are reported annually using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Each year’s return is due by January 31 of the following year.
And now, a word from the states…
That’s right—payroll taxes aren’t solely the federal government’s domain. States have their own payroll taxes as well. Every state has its own unemployment tax (called SUTA or UI).
This tax rate can vary not only by state but within each state as well. This is because your company’s industry, years in business and unemployment history can all determine the percentage used to calculate the amount due.
There are several other types of non-federal payroll taxes out there. These can cover programs like short- and long-term disability, workers’ compensation, paid medical or family leave and more.
And while we discussed state income tax in a previous article, you should also remember local income taxes. These are sometimes assessed in large urban areas (think New York City, San Francisco, etc.). There are 14 states that allow local governments to collect an income tax.
Finally, the collection, remittance and reporting of state and local-level taxes depend on the governments that levy the taxes. Each entity has its own rules and methods.
Get help from a tax professional
Clearly, the subject of payroll taxes involves plenty of moving parts and covers a wide range of accounting knowledge. A U.S.-based international CPA can draw on expertise in all of these areas when advising you on your unique business setup.
At James Moore, our international tax advisors pride themselves on providing comprehensive accounting, tax and consulting services for multinational companies, individuals and businesses entering the U.S.
Contact us to help you with your foreign tax needs today, and watch your business grow.