Understanding Employee & Employer Payroll Taxes

Payroll taxes are an essential part of processing payroll accurately. Some taxes are withheld from an employee's paycheck, while others are paid by the employer. Understanding the difference helps ensure compliance with federal, state, and local tax requirements.

Employee Taxes (Withheld from Paychecks)

An employee's gross pay is the total amount they earn before taxes and deductions are withheld.

An employee's net pay is the amount they take home after taxes and deductions have been subtracted.

Federal Income Tax

• Withheld based on the employee's:
  • Form W-4
  • Filing status
  • Tax withholding elections
• Calculated using IRS tax brackets.

Social Security Tax

• Employee pays 6.2%
• Employer also contributes 6.2%
• Applies to wages up to the annual wage base limit.
• 2025 wage limit: $176,100

Medicare Tax

• Employee pays 1.45%
• Employer also contributes 1.45%
• No wage limit applies.

Additional Medicare Tax

Employees earning more than $200,000 in a calendar year are subject to:

• An additional 0.9% Medicare Tax
• Applies only to wages above the threshold.
• This additional tax is withheld from the employee only.

State Income Tax

Many states require state income tax withholding.

States with no state income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Paid Family & Medical Leave (PFML)

Some states require employees and/or employers to contribute to state-paid family and medical leave programs.

Contribution requirements vary by state.

Local Taxes

Depending on where employees work or live, additional local taxes may apply, including:

• City taxes
• County taxes
• Other local payroll taxes

Employer Payroll Taxes

In addition to withholding employee taxes, employers are responsible for paying several payroll taxes.

Federal Unemployment Tax (FUTA)

• Standard FUTA rate: 6.0%
• Applies to the first $7,000 of wages paid to each employee annually.
• Employers may qualify for a credit of up to 5.4% when state unemployment taxes are paid on time.

State Unemployment Insurance (SUI/SUTA)

• Required in most states.
• Tax rates are assigned by each state.
• Rates may change each year based on the employer's experience rating and state regulations.

Social Security Tax

Employers match the employee contribution:

• 6.2%
• Applies to wages up to the annual wage base limit.

Medicare Tax

Employers also match Medicare taxes:

• 1.45%
• No wage cap.

Paid Family & Medical Leave (PFML)

Some states require employers to contribute toward paid leave programs.

Contribution requirements vary by state.

Local Employer Payroll Taxes

Some jurisdictions require employers to pay additional payroll taxes based on state or local laws.

Other Payroll Deductions

Employees may also have voluntary deductions that reduce their take-home pay, including:

• Retirement plan contributions (401(k), SIMPLE IRA, etc.)
• Health insurance premiums
• Dental and vision insurance
• Health Savings Accounts (HSA)
• Flexible Spending Accounts (FSA)
• Other employer-sponsored benefit deductions

Self-Employment Taxes

Individuals who are self-employed are responsible for paying both the employee and employer portions of:

• Social Security Tax
• Medicare Tax

Together, these are commonly referred to as Self-Employment Tax.

Key Takeaways

• Employee taxes are withheld from employee paychecks.
• Employer taxes are paid by the employer in addition to employee wages.
• Social Security and Medicare taxes are generally shared between employees and employers.
• FUTA and SUI are employer-paid unemployment taxes.
• State and local tax requirements vary by location.
• Some states require Paid Family & Medical Leave contributions.
• Employees may have additional voluntary deductions such as retirement or insurance benefits.

Need Assistance?

If you have questions about payroll taxes or payroll compliance in Aaniie Payroll, our Support Team is here to help.

Email: support@aaniie.com