What is payroll tax?

Unlike income taxes that cover all types of earnings, payroll taxes only apply to employment wages, not investment income or other earnings. The IRS considers these "trust fund taxes" because employers hold this money in trust for the government.

What are the main types of payroll taxes?

The main types of payroll tax include income taxes, Federal Insurance Contribution Act (FICA) taxes, and unemployment taxes.

FICA taxes include Social Security tax (6.2%) and Medicare tax (1.45%), paid by both employer and employee. For high-income earners making over $200,000, an additional 0.9% Medicare tax applies.

Employers also pay federal unemployment tax (FUTA) and state unemployment insurance, with rates varying by location and claims history.

Some states and cities require additional withholdings for programs like disability insurance or paid family leave. For example, California, New York, and New Jersey maintain state disability insurance programs funded through payroll taxes.

How are payroll taxes calculated?

Payroll taxes are based on a percentage of employee wages. In 2025, Social Security tax applies to wages up to $176,100, while Medicare tax has no limit. Unemployment tax is more complex, with federal rates starting at 6% on the first $7,000 of wages.

State unemployment rates vary, often starting higher for new businesses and decreasing over time based on claim history.

When are payroll taxes due?

Companies must file quarterly returns through Form 941 and provide annual Form W-2s to employees by January 31. The IRS assigns specific deadlines based on your tax liability history.