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TL;DR:
US payroll taxes have two layers. Federal taxes, uniform nationwide, include FICA (Social Security & Medicare) and FUTA (Federal Unemployment). State taxes, which vary widely, include SUI (State Unemployment) and, in most states, state income tax withholding. Employers are responsible for withholding, paying, and reporting both types.
Direct Question Answer
What is this about? A detailed breakdown of the different types of payroll taxes at the federal and state levels in the USA. Who is it for? Business owners and HR managers running payroll in the US. When is it relevant? Whenever processing payroll and making tax deposits, as both federal and state obligations must be met.
Decision Summary
Who should act? Any employer with US employees must understand and manage this dual system. Who can ignore? No one. Failure to comply with either federal or state payroll tax laws leads to significant penalties.
For new employers in the United States, one of the most confusing concepts is the dual nature of payroll taxes. It's not a single system; rather, it's a layered set of obligations owed to both the federal government (via the IRS) and the individual state governments where your employees work.
Each layer has different taxes, different rates, and different reporting requirements. Misunderstanding this distinction is a common source of payroll errors and penalties. This guide breaks down the two layers clearly.
Layer 1: Federal Payroll Taxes (IRS)
These taxes are uniform across the entire country and are administered by the Internal Revenue Service (IRS).
Federal Income Tax Withholding
This is not a tax on the employer. You are simply required to withhold this money from an employee's paycheck on behalf of the IRS. The amount is determined by the employee's Form W-4.
FICA Taxes (Social Security & Medicare)
This is the largest component of payroll taxes. FICA is split between the employee and the employer.
- Social Security: You withhold 6.2% from the employee's pay (up to an annual wage limit), and you, the employer, also contribute a matching 6.2%.
- Medicare: You withhold 1.45% from the employee's pay (with no wage limit), and you also contribute a matching 1.45%.
So, for every employee, you are responsible for remitting a total of 15.3% of their eligible wages for FICA (half from them, half from you).
FUTA Tax (Federal Unemployment)
This is an employer-only tax. It is paid to the federal government to fund unemployment benefits. The rate is currently 6.0% on the first $7,000 of an employee's wages, but most employers get a credit that reduces it to a much lower effective rate if they also pay state unemployment taxes.
Layer 2: State Payroll Taxes
These taxes vary dramatically from state to state and are owed to the state where the employee performs their work.
State Income Tax Withholding
Similar to federal income tax, most states (but not all, e.g., Texas, Florida) have a state income tax. As an employer, you must withhold this from the employee's paycheck according to that state's specific rules and forms.
SUI Tax (State Unemployment Insurance)
This is the state-level counterpart to FUTA. It is an employer-only tax paid to the state to fund its unemployment benefits program. Each state sets its own tax rate and wage base, and the rate for a new employer is different from an established one.
Other State & Local Taxes
Some states or cities have additional payroll taxes, such as disability insurance, paid family leave contributions, or local income taxes. This adds another layer of complexity for multi-state employers.
Related Services
This guide is part of our comprehensive coverage of US payroll compliance. YourLegal provides an all-in-one platform to handle these complex requirements for you.