Types of Payroll Taxes: A Guide for Employers and Employees

Do you find payroll tax terms such as FICA, FUTA, or SUTA confusing? Do you wonder how these acronyms apply to your business? You're not alone—payroll taxes can be overwhelming. Figuring out which ones you're responsible for as an employer is just the beginning.

As a small business owner, understanding the different types of payroll taxes is crucial. This guide breaks down the differences between employee and employer payroll taxes to help you stay informed and compliant.

What are Payroll Taxes?

Payroll taxes are deductions taken from an employee’s paycheck by the employer. These include mandatory federal tax contributions and federal, state, and local income taxes.

Payroll taxes also refer to the portion employers must pay on behalf of each employee.

Payroll taxes apply only to W-2 employees, and understanding W-2 forms is crucial for efficiently managing these taxes. You’re not required to withhold or pay payroll taxes for independent contractors (independent contractors are responsible for paying self-employed payroll taxes).

What are Employer Payroll Taxes?

Employer payroll taxes are contributions you, as the employer, must pay for each employee. These include taxes that fund federal insurance, unemployment programs, and any additional state or local tax initiatives. Let’s break down each of these individually:

Federal Insurance Contributions Act (FICA)

Commonly referred to as FICA taxes, these include Social Security and Medicare taxes. FICA taxes have flat-rate contribution requirements split evenly between you and your employee.

• Social Security Tax: Social Security Tax is known as Old Age, Survivors, and Disability Insurance (OASDI). These monthly benefits are designed to partially replace the loss of income due to retirement, disability, or death. It’s the largest income-maintenance program in the U.S.

• Medicare Tax: Medicare tax funds Medicare, the federal health insurance program for people 65 and older and certain people under 65 with qualifying disabilities or conditions.

Federal Unemployment Tax (FUTA)

Federal Unemployment Tax (FUTA) funds federal unemployment programs that provide financial support to workers who have lost their jobs. Employers are typically required to pay federal and state unemployment taxes for each employee.

State Unemployment Tax Act (SUTA)

Commonly known as SUTA Tax, this tax funds state-specific unemployment benefits. This tax is also referred to as State Unemployment Insurance (SUI). The contribution rates vary by state, so you must check each state’s unemployment agency website for the specific tax rate.

Applicable State and Local Taxes

Some states and cities require additional employer payroll taxes. For instance, employers with W-2 workers in Massachusetts must pay an additional state tax called the Employer Medical Assistance Contribution (EMAC), which helps fund subsidized healthcare to low-income residents. You must check your employee’s work and residence locations to determine additional tax obligations.

What are Employee Payroll Taxes?

Employee payroll taxes refer to the taxes an employee owes from their paycheck. While the employee ultimately pays these taxes, it’s important to remember that as the employer, you’re responsible for withholding these contributions and submitting them to the IRS on their behalf.

Federal Insurance Contributions Act (FICA)

Similar to employers, employees are required to pay FICA taxes. These contributions are at a flat rate percentage, up to a certain wage limit. For 2025, the Social Security Tax has a wage base of $176,100, meaning both employer and employee contributions stop once the employee reaches this amount in taxable earnings. However, unlike Social Security, Medicare taxes have no wage base limit. Employees who earn over $200,000 in a calendar year are subject to an additional Medicare Tax.

Federal Income Tax

Federal income tax is withheld from all taxable income, including wages, salaries, commissions, and bonuses. The amount withheld varies for each employee, depending on their filing status, exemptions, income bracket, and tax credits. This is why it's essential for you to have your newly hired employees complete Form W-4 (Employee’s Withholding Certificate) so you can properly calculate their withholdings.

State Income Tax

Akin to federal income tax, state income tax is based on the employee’s income and filing status. Not all states impose an income tax, so be sure to check each state’s specific requirements when onboarding a new employee.

While Form W-4 is for federal income tax purposes only, some states have their own withholding forms. You must complete these to ensure the correct amount is withheld from each paycheck.

Local City Tax

Local income tax can vary based on your specific location within a state and may depend on your work and residential addresses. You must understand the tax regime in your area to ensure compliance and avoid any unexpected tax liabilities.

Here's a handy chart for the different types of payroll taxes required of employers and employees:

How Justworks Can Help with Different Types of Payroll Taxes

We get it—navigating the different types of payroll taxes can be overwhelming. Additionally, tracking wage-based thresholds and specific local taxes can take hours of your time. Justworks simplifies this process and helps you save valuable time.

Justworks automatically withholds the correct tax contributions, stays updated on state and local tax regulations changes, and tracks those wage base limits—so you can focus on what you do best.

Beyond offering compliance support for your business, Justworks provides additional features and services that free up your schedule so you can focus on growing your business. Ask Clove, the healthcare sneaker professional. Clove quickly discovered that state and federal governments have specific expectations, regardless of whether a business has a two-person team or a staff of 500.

After joining Justworks, Clove witnessed a significant reduction in the time spent on tax compliance, allowing the company to focus on growing its brand. Ready to learn more about how Justworks can help you free up time to grow your business? Contact Justworks today to get started.