How to Calculate Payroll Taxes
A step-by-step guide to calculating federal payroll taxes including FICA, FUTA, withholding, and employer contributions, with formulas and worked examples.
What Are Payroll Taxes?
Payroll taxes are mandatory deductions from employee wages and matching contributions from employers, remitted to federal, state, and local governments. They fund Social Security, Medicare (together called FICA), federal unemployment insurance (FUTA), and state unemployment insurance (SUTA). Employers act as withholding agents — they collect the employee share from each paycheck and add their own matching share before sending the combined payment to the IRS.
FICA: Social Security and Medicare
FICA consists of two taxes. Social Security is 6.2% on wages up to the annual wage base ($176,100 for 2025); the employer also pays 6.2%, for a combined 12.4%. Medicare is 1.45% with no wage cap; the employer matches another 1.45% for a combined 2.9%. High earners pay an additional 0.9% Additional Medicare Tax on wages above $200,000 (single) or $250,000 (married filing jointly), but this extra amount is employee-only — there is no employer match.
Federal Income Tax Withholding
Federal income tax withholding is not a flat rate. It depends on the employee's W-4 elections, pay frequency, and gross wages. The IRS Publication 15-T provides both percentage method tables and wage bracket tables. For the percentage method, you subtract the employee's adjusted withholding amount (derived from W-4 Step 2 and Step 3 elections), apply the appropriate bracket, and add the base withholding for that bracket. Most payroll software automates this, but understanding the structure helps you reconcile discrepancies.
FUTA: Federal Unemployment Tax
FUTA is 6.0% on the first $7,000 of each employee's wages per year. Most employers receive a 5.4% credit for state unemployment taxes paid on time, bringing the effective FUTA rate to 0.6%. At 0.6%, the maximum FUTA liability per employee per year is $42 ($7,000 × 0.006). FUTA is entirely employer-paid — no amount is withheld from employee wages. Employers deposit FUTA taxes quarterly using EFTPS when the cumulative liability exceeds $500.
Calculating Total Employer Cost Per Employee
Total payroll cost = Gross Wages + Employer FICA (7.65% of gross) + FUTA + SUTA + Benefits. For an employee earning $5,000 per month: Employer Social Security = $310, Employer Medicare = $72.50, total FICA = $382.50. Add FUTA ($42/year prorated) and state unemployment. The true cost of employing that person is roughly $5,400–$5,600 per month before benefits like health insurance or a retirement match. This "burden rate" typically runs 18–25% above base wages.
Payroll Tax Deposit Schedule
The IRS assigns employers a deposit schedule — monthly or semi-weekly — based on the total taxes reported in the lookback period (the 12-month period ending June 30 of the prior year). If lookback taxes were $50,000 or less, you deposit monthly; if above $50,000, you deposit semi-weekly. New employers default to monthly. Failure to deposit on time triggers penalties of 2–15% of the unpaid amount depending on how late the deposit is.
State and Local Payroll Taxes
In addition to federal taxes, most states impose income tax withholding and state unemployment insurance (SUTA). SUTA rates vary by state and employer experience rating, typically ranging from 1% to 8% on the first $10,000–$50,000 of wages per employee. Some states have additional taxes such as disability insurance (California SDI, New Jersey TDI) or paid family leave contributions. Cities like New York City and Philadelphia levy local income taxes on top of state taxes. Always verify current rates with the applicable state revenue agency.
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