Which Payroll Taxes Are Solely Your Responsibility as an Employer to Pay?

Did you know some payroll taxes are paid solely by employers? Payroll taxes include Social Security, Medicare, and unemployment taxes, among others. While employees see deductions from their paychecks, certain taxes fall squarely on the employer’s shoulders. In this article, explore employer-paid taxes to help you navigate your payroll obligations and avoid costly penalties.

What Are Employer-Only Payroll Taxes?

The Federal Unemployment Tax Act (FUTA)

What FUTA Covers and Why It’s Crucial

The Federal Unemployment Tax Act (FUTA) is a cornerstone of employer payroll tax responsibilities. This federal tax funds unemployment programs, providing temporary financial support to workers who lose their jobs. Employers are required to pay this tax to the IRS, as it is not withheld from employee paychecks.

Calculating FUTA is straightforward but requires attention to payroll tax calculations. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages annually.

State Unemployment Insurance (SUI) Taxes

Understanding State-Specific Unemployment Tax Rates

State unemployment taxes (SUI) vary significantly depending on your business’s location, industry, and claims history. Each state sets its own unemployment tax rate, often reassessed annually. New businesses typically start with a standard rate, such as 3.4% in California.

Employer Obligations in Alaska, New Jersey, and Pennsylvania

In most states, only employers are required to pay state unemployment taxes, but states like Alaska, New Jersey, and Pennsylvania also require employees to contribute. For example:

• Alaska: Employers pay 1.06%, and employees contribute 0.5%.
• New Jersey: Employers and employees share responsibility for workforce development fund taxes.
• Pennsylvania: Employees pay 0.07% on wages.

Ensure your payroll system is set to handle state and local taxes to maintain compliance with state unemployment insurance requirements.

Further Reading: Explore how your federal tax dollars are spent

How to Calculate Employer Payroll Taxes

Breaking Down Federal and State Tax Contributions

Steps for Accurately Calculating FUTA and SUI Taxes

1. Identify each employee’s earnings up to the taxable wage limit for FUTA and SUI.
2. Apply the federal unemployment tax rate (6%) for FUTA, reducing it with the SUTA credit if applicable.
3. Determine your state unemployment tax rate based on your business type and claims record.
4. Add any applicable local income taxes to the calculation.
5. Cross-check with IRS guidelines or a trusted payroll service provider to ensure accuracy.

Tools to Simplify Payroll Tax Calculations

Modern payroll software, like QuickBooks or Gusto, automates payroll tax withholdings and ensures compliance with federal and state taxes. These tools:

• Calculate employer payroll taxes, including FUTA, SUTA, and FICA.
• Generate required forms like IRS Form 940, 941, and W-2s.
• Facilitate tax payments via the Electronic Federal Tax Payment System.

Further Reading: Learn how to manage your payroll accounting and bookkeeping

Employer and Employee Tax Responsibilities Compared

The Split of Social Security and Medicare Taxes (FICA)

How the 50-50 Split Works for FICA

Under the Federal Insurance Contributions Act (FICA), both employers and employees share the cost of social security and medicare taxes:

• Social Security Tax: 6.2% each on wages up to $168,600 (2024-2025 cap).
• Medicare Tax: 1.45% each, with no income cap.

For example, if an employee earns $100,000, the employer must contribute $7,650 ($6,200 for Social Security and $1,450 for Medicare). These taxes fund critical social programs like retirement and healthcare.

Yearly Caps for Social Security Tax Contributions

In 2024 and 2025, the social security tax cap is set at $168,600. After an employee reaches this threshold, neither you nor they pay additional Social Security taxes. However, Medicare taxes continue to apply regardless of wage level.

Additional Medicare Taxes for High Earners

When and How Employers Must Withhold the Additional Medicare Tax

If an employee’s wages exceed $200,000 in a calendar year, you’re required to withhold an Additional Medicare Tax of 0.9% on the excess. This applies regardless of their filing status. For instance, if an employee earns $250,000, you must withhold 0.9% of the $50,000 above the threshold.

Clarifying Employer vs. Employee Obligations

Employers are responsible for withholding the Additional Medicare Tax but do not pay a matching portion. The tax is paid entirely by the employee when they file their tax return. Make sure your payroll calculations include this withholding once an employee crosses the $200,000 mark to remain compliant.

Best Practices for Managing Employer Payroll Tax Responsibilities

Staying Compliant with IRS Requirements

Filing Forms 940, 941, and W-2s Correctly and On Time

Compliance with federal and state unemployment taxes requires precise planning and timely filing of essential forms. Key points:

• Form 940: Use this to report federal unemployment taxes (FUTA) annually. The FUTA tax rate is 6% but can be reduced with timely state tax payments.
• Form 941: Filed quarterly to report withheld FICA taxes and federal income taxes paid. Accurate reporting ensures no discrepancies in your quarterly federal tax return.
• Form W-2: Provide to employees and the IRS to summarize wages, payroll tax deductions, and taxes withheld. Ensure these are issued by January 31.

Errors in these forms, such as failing to account for a new employee's correct wage or miscalculating payroll taxes, can trigger audits. Double-check details like employee wages and state income tax withholdings to avoid penalties.

Understanding the Electronic Federal Tax Payment System (EFTPS)

The EFTPS simplifies your obligation to pay federal and state unemployment taxes. Here's why it’s indispensable:

• Allows you to calculate payroll tax liabilities and schedule payments, ensuring you never miss deadlines.
• Tracks historical payments for better payroll planning and reporting.
• Reduces the risk of common payroll mistakes, such as late filings or incorrect amounts paid to the IRS.

Enroll online and automate tax payments to streamline managing payroll.

Further Reading: Know how to report uncollected Social Security and Medicare tax

Key Takeaways

• Employer-Only Payroll Taxes: FUTA and SUTA taxes, which fund unemployment benefits, are paid only by employers and not deducted from employees’ paychecks.
• Accurate Tax Withholding: Taxes include federal income, Social Security, and Medicare taxes, some of which are shared between employers and employees.
• IRS Filing Compliance: Forms like 940, 941, and W-2 must be submitted on time to accurately report taxes paid by the employee and employer.
• Outsourcing Payroll Tasks: Payroll services simplify managing complex federal and state taxes to reduce errors and save time.
• New Employee Onboarding: Ensure employees complete Form W-4 correctly to calculate how much federal income tax employees may owe.

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