As you’re undoubtedly aware, employers bear the responsibility of withholding and remitting payroll taxes. Maintaining vigilance over payroll tax compliance is imperative, especially in the absence of third-party providers. Given the potential ramifications of non-compliance, maintaining proper administration is paramount. Let’s review the six major payroll taxes to keep an eye on.

Six Major Payroll Taxes

1. Federal

Employers must withhold federal income tax from employees’ paychecks. The amount of income tax withheld from each employee’s pay depends on two factors: 1) the amount of the wages, and 2) information provided on the employee’s Form W-4, “Employee’s Withholding Certificate.” Additional withholding rules may apply to commissions and other forms of compensation.

2. State & Local

Be sure to stay apprised of your non-federal payroll tax obligations. State income tax withholding rules, for example, apply to many employers. However, eight states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) don’t impose an income tax. New Hampshire and Tennessee don’t tax wages. Certain localities also impose income taxes. And in some places, withholding is required to cover short-term disability, paid family leave or unemployment benefits.

3. FICA

Payroll taxes authorized under the Federal Insurance Contributions Act (FICA) comprise two components. The first is a Social Security tax of 6.2% on an amount up to an annual “wage base.” In 2024, that wage base is $168,600. The second FICA component is a Medicare tax of 1.45% on all wages. Both employers and employees must pay FICA tax; employers must withhold the employees’ share.

4. FUTA

The Federal Unemployment Tax Act (FUTA) created a special tax that applies to the first $7,000 of wages of every employee. The purpose of this tax is to help states pay employees who have been involuntarily terminated from their jobs. The basic FUTA rate is 6%, but employers can benefit from a credit for state unemployment tax of up to 5.4%, resulting in an effective tax of 0.6%. However, the credit is reduced if a state borrows from the federal government to cover its unemployment benefits liability and doesn’t repay the funds.

5. State Unemployment

Every state also runs its own unemployment insurance program to provide benefits to eligible workers who are involuntarily terminated. Generally, the rate employers must pay is based on their claims experience. The more claims made by former employees, the higher the tax rate. States update these rates annually.

6. Additional Medicare Tax

This payroll tax often flies under the radar. Under a provision of the Affordable Care Act, the additional Medicare tax of 0.9% applies to employee wages above $200,000 for single filers, $250,000 for joint married filers and $125,000 for separate married filers. Note that this tax is paid by employees only. However, employers are responsible for withholding it, when applicable.

If your organization has been operational for a while, you’re likely well aware of the additional Medicare tax, as well as the other five major payroll taxes discussed above. Nevertheless, most employers can benefit from taking a continuous-improvement approach to payroll taxes, always looking for ways to improve efficiency and better maintain compliance. We can help you assess the costs and efficacy of your payroll processes, contact us.