Types of Payroll Taxes in the US: Who Pays What

Payroll tax breaks into four federal obligations plus a state layer, and each one splits differently between employer and employee.

Getting the split wrong is what produces the surprise: an employer budgets for the salary, then meets a bill for taxes nobody withheld from anyone. Here is each tax, the current rate, and whose money it comes out of.

TL;DR

• Employer only: FUTA on the first $7,000 per employee, plus state unemployment tax. No part of either comes out of employee pay.
• Employee only: federal income tax withholding, plus the 0.9% Additional Medicare Tax above $200,000.
• Split evenly: Social Security at 6.2% each up to $184,500 in 2026, Medicare at 1.45% each with no cap.
• What it costs: an $80,000 hire runs the employer about $6,162 in federal payroll tax, and hiring from outside the US changes the registrations you need, not the rates you pay.
• The state layer: unemployment insurance everywhere, income tax withholding in most states, and some states add their own.
• Filing: Form 941 quarterly for income tax and FICA, Form 940 annually for FUTA, with deposits on their own separate schedule.

The Four Federal Payroll Taxes at a Glance

Four federal taxes attach to wages, and they divide three ways between employer and employee.

All of them are levied on compensation for work: wages, salaries, tips, bonuses, commissions and most taxable fringe benefits. They do not reach business profit, dividends, rent or investment income, which is what separates payroll tax from income tax on the business itself.

Social Security and Medicare together are what people mean by FICA. Combined, they cost 7.65% to the employer and another 7.65% to the employee, before any cap applies.

Federal income tax withholding sits in the table because it runs through payroll, but the employer never pays it. The employer's job there is collection and remittance.

Which Payroll Taxes Employers Pay

Two federal taxes come entirely from the employer's own funds, and two more are matched.

Budget for roughly 7.65% of payroll in matched FICA, plus unemployment tax on the first slice of each employee's wages.

Your exact unemployment figure depends on the state and your claims history, so it is the one line in a hiring budget that cannot be taken from a national table. Everything else at the federal level is fixed by rate and cap.

FUTA: 6.0% on Paper, 0.6% in Practice

The federal unemployment tax rate is 6.0% of the first $7,000 you pay each employee during the year. Almost nobody pays that.

Employers who pay their state unemployment tax in full and on time claim a credit of up to 5.4%, which brings the effective rate to 0.6%. On $7,000 of wages that is $42 per employee per year.

The IRS is explicit that this one never touches employee pay: you pay FUTA from your own funds, and employees neither pay it nor have it withheld. It is reported annually on Form 940.

State Unemployment Tax Is the Variable One

Every state runs its own unemployment insurance system, with its own rate and its own wage base. New employers usually start on a standard rate and move to an experience rating over time.

Two things drive what you pay:

• Your state's wage base, which can be far above the federal $7,000
• Your claims history, since employers whose former staff draw benefits pay more

Those two systems are joined by the credit above. Paying state unemployment tax late can cost the 5.4% FUTA credit on top of any state penalty, turning a $42 federal bill into a $420 one.

Which Payroll Taxes Come Out of Employee Pay

Federal income tax withholding and the Additional Medicare Tax are employee money. The employer calculates and remits them but contributes nothing.

Withholding amounts come from the employee's Form W-4 together with the IRS withholding tables. It is not a fixed percentage, which is why two employees on identical salaries can have visibly different take-home pay.

Three things change what any given employee has withheld:

• Filing status and dependents claimed on the W-4
• Other income or deductions the employee reports there
• Any extra withholding they ask for voluntarily

None of that is the employer's judgment call. You apply the W-4 as submitted, and an employee who wants a different outcome files a new one rather than asking payroll to adjust it.

That withheld amount is an estimate collected in advance, and the employee's actual liability gets settled on their own return.

The Additional Medicare Tax Has No Employer Match

The Additional Medicare Tax is the other piece of employee-only money, and it breaks FICA's matching structure. It adds 0.9% on wages above $200,000, the employer withholds it once that threshold is crossed, and there is no employer match on this portion.

That $200,000 figure is the withholding trigger, applied regardless of filing status. The employee's own liability threshold on their return can differ by filing status, which is settled when they file rather than through payroll.

Social Security and Medicare: Where the Split Is Even

FICA is the matched pair, and the two halves behave differently as salaries rise.

The Social Security cap moves most years, so a figure you memorized two years ago is probably wrong now. Medicare has no ceiling. A high earner's FICA cost keeps climbing after Social Security has stopped.

• Below $184,500: both taxes run, 7.65% each side
• Above $184,500: Social Security stops, Medicare continues at 1.45% each side
• Above $200,000: the employee adds 0.9%, with no employer match

Both halves are your responsibility to collect and deposit. Withholding the employee share and failing to remit it is treated far more seriously than an ordinary late payment, because those amounts belonged to the employee.

One point catches employers with staff who joined mid-year. The Social Security cap applies per employee per employer, so someone who already hit the cap at a previous job still restarts at zero with you, and you still withhold.

The employee can recover the excess when they file their own return. Your obligation to withhold is unaffected, and there is no mechanism to stop partway on the strength of what a previous employer collected.

What Each Payroll Tax Actually Funds

Unlike income tax, which goes into general revenue, payroll taxes are earmarked. Each one funds a specific program, which is why they sit on wages rather than on profit.

Social Security is the answer to the common phrasing about a federal payroll tax supporting retired workers. It also covers disability and survivors benefits, which is why the official name of the program is broader than retirement alone.

The earmarking explains the wage cap too. Social Security benefits are calculated from earnings up to a limit, so contributions stop at a matching limit. Medicare benefits are not scaled that way, and neither is its tax.

What the State Layer Adds

Every state adds unemployment insurance. Beyond that, the picture varies enough that "payroll taxes by state" is a genuinely different question in each one.

A handful of states levy no personal income tax, so there is no state withholding to run. Unemployment insurance still applies there, which catches employers who read no income tax as no state payroll obligations at all.

Where an employee works, not where the company is registered, generally drives which state's rules apply. One remote hire in a new state can create a registration and filing obligation there.

That matters more than it used to. A distributed team of ten people can sit in eight states, and each state brings its own set of obligations:

• An unemployment insurance account and rate
• Withholding registration, in states that levy income tax
• Its own deposit frequency and filing calendar
• Any paid leave or local taxes that jurisdiction adds

Reciprocity agreements between neighboring states can simplify withholding where an employee lives in one state and works in another, but they vary by pair and do not touch unemployment insurance. Check the specific combination rather than assuming.

A Worked Example: One Employee on $80,000

An $80,000 salary costs a US employer about $6,162 in federal payroll tax on top of the wage. Here is where that figure comes from, on 2026 federal rates and before any state tax.

So an $80,000 hire costs the employer about $86,162 before state unemployment tax and before benefits. The rule of thumb that payroll taxes add somewhere near 8% to a salary holds at this level, and it breaks down at both extremes.

Above $184,500 the employer's percentage falls, because Social Security stops while salary continues. Below the FUTA wage base the percentage rises, since $42 is a larger share of a small wage.

Run the same arithmetic on a $250,000 salary and the effect is visible:

That employer cost is about 6.0% of salary rather than 7.7%, purely because Social Security stopped at the cap. The employee's side moves the other way, since the Additional Medicare Tax has no employer match to soften it.

How and When You Actually File

Federal payroll taxes are reported on two returns, and the money moves on a schedule separate from both of them.

• Form 941, filed quarterly, reports federal income tax withheld plus the employer and employee shares of Social Security and Medicare
• Form 940, filed annually, reports FUTA
• Deposits of the tax itself are made on a monthly or semiweekly schedule, determined by your prior lookback period, not by when the return is due

Separating the return from the deposit is the part that catches new employers. Filing Form 941 on time does nothing for a deposit that was due weeks earlier, and the penalty attaches to the deposit.

Your deposit schedule is assigned rather than chosen. The IRS sets it from a lookback period, so it is assigned rather than chosen, and a business that grew last year can find itself moved from monthly to semiweekly without having changed anything about how it runs payroll.

States run their own deposit and filing calendars on top of this, and they rarely align with the federal one. A single payroll run can therefore trigger:

• A federal deposit on its own monthly or semiweekly schedule
• A state withholding deposit on a different schedule
• A state unemployment payment, usually quarterly
• Quarterly and annual returns at each level

The IRS publishes the current rates, forms and deposit rules on its employment taxes pages, which is the place to confirm figures before a filing season.

Hiring Your First US Employee from Outside the Country

Being a foreign-owned company generally changes none of the obligations above. A US entity with a US employee is a US employer, and the filing obligations are identical to a domestic company's.

What does change is the setup work, and it runs ahead of the first payday rather than alongside it:

• An EIN, since payroll cannot be run or reported without one
• Registration with the state tax agency where the employee works
• A separate state unemployment insurance account, which is usually a different registration again
• Workers' compensation coverage, where the state requires it

State registrations are the slow step. They can take weeks and they differ in every state, so a first payday arriving before the registration creates a filing you cannot make on time.

Sequence that works: EIN first, then state tax and unemployment registrations, then the offer letter, then the first payroll run.

Founders used to systems where one national registration covers employment often underestimate this. In the US the federal layer is the straightforward part, and the state layer is where the work sits.

Two further points catch first-time US employers:

• Where the work happens governs. Paying someone through a foreign entity generally does not remove US payroll obligations where the work is performed in the US by a US worker. Paying in a foreign currency or from an overseas bank account changes nothing about what is owed.
• The registrations set the pace. An EIN can be obtained relatively quickly, but state unemployment accounts often cannot, which is what forces the order above.

Four Mistakes That Turn Into Penalties

Four errors recur in early payroll setups, and each one is avoidable with a calendar and a registration check.

The $7,000 FUTA Base Is Per Employee, Not Per Business

FUTA applies to the first $7,000 of each employee's wages, so the cost scales with headcount. Ten employees means ten $7,000 slices, not one.

The arithmetic stays small either way, so it gets overlooked. What bites is the credit.

• State unemployment paid in full and on time: FUTA costs roughly $42 per employee
• State unemployment late: the 5.4% credit can be lost, moving the rate toward 6.0%
• On $7,000 of wages that is the difference between $42 and $420 per employee

Both systems meet at exactly this point. A state payment slipping by a week reaches the federal bill too.

Your Contractor May Be an Employee

Classifying a worker as a contractor puts them outside payroll entirely, with no withholding and no employer FICA. That is what makes the classification worth testing.

Classification turns on the working relationship, not the label on the agreement or the invoice. A reclassification is retrospective, and it brings the withholding that should have happened, the employer share that was never paid, and penalties on both.

Risk concentrates in long-running arrangements. A contractor engaged for a single project rarely raises the question, while one who has worked set hours for the same company for two years, using its systems and reporting to its managers, invites it.

The State Registration Has to Exist Before the First Payday

Payroll obligations follow where the employee works. Hiring into a new state creates registration requirements there, and they do not wait for you to notice.

Start registrations before the offer is signed where you can. A first payday with no state account leaves you owing a return you have no account number to file.

Worth knowing: backdating is not available. The penalty runs from the original due date, however long your state account takes to open.

Remote hiring makes this easier to miss than an office relocation would. Nobody signs a lease in the new state, so the only signal that a registration is due is the employee's home address on an onboarding form.

Confusing the Deposit Schedule With the Return

Form 941 is quarterly, but the money is not. Deposits fall monthly or semiweekly depending on your lookback period, and an on-time return does not cure a late deposit.

Failure-to-deposit penalties are calculated on the unpaid deposit and rise in fixed bands:

The bands replace each other rather than stacking, so a deposit 20 days late carries the 10% penalty alone. Withheld employee tax carries further exposure still, since that money was held on someone else's behalf rather than being company funds paid late.

How FinStackk Helps With US Payroll

Payroll compliance fails on registrations and deposit dates, not on arithmetic. Our Fin-Hire module runs payroll from wage and deduction calculations through to filing, including, payroll tax filings, year-end W-2s and the employer registrations that have to exist first.

Fin-Tax tracks the federal, state, county and city deadlines that follow. If you are hiring your first US employee from outside the country, book a free demo and we will map the registrations you need before the first payday.

Frequently Asked Questions

What are considered payroll taxes?

At the federal level, payroll taxes are Social Security and Medicare (together called FICA), federal unemployment tax (FUTA), and federal income tax withheld from wages. States add unemployment insurance, and most add state income tax withholding, with some jurisdictions adding paid leave or local taxes.

Social Security and Medicare are shared between employer and employee. FUTA is employer-only, and income tax withholding is employee money the employer collects and remits.

Which payroll taxes are paid by employers only?

Federal unemployment tax (FUTA) and, in most states, state unemployment insurance are paid entirely by the employer with no employee-paid portion. The IRS states that employees do not pay FUTA and it is not withheld from their pay.

Employers also pay a matching half of Social Security and Medicare, though those are shared rather than employer-only. A few states require employee contributions toward unemployment or paid leave, so check the state answer locally.

How much are payroll taxes as a percentage of salary?

For an employer, federal payroll taxes generally come to about 7.65% of wages in matched FICA, plus a small unemployment amount, so roughly 8% in total before state unemployment tax.

That percentage falls for high earners once wages pass the $184,500 Social Security cap in 2026, since Social Security stops while Medicare continues. Employees pay their own 7.65% in FICA plus income tax withholding set by their Form W-4.

Related reading

For a fuller view of the filings and deposit duties that sit around these taxes, read our US payroll guide for employers.