Payroll Tax

A payroll tax is a mandatory tax that employers must withhold from employee wages and remit to government authorities to fund public programs such as Social Security, Medicare, and unemployment insurance. Both employers and employees share responsibility for paying payroll taxes, though specific components vary under U.S. federal and state law.

Payroll taxes are a key element of compensation compliance and HR payroll management, ensuring legal and accurate wage reporting.

Components of U.S. Payroll Taxes

Payroll taxes in the United States consist of several key components:

• Social Security Tax (OASDI): Funds retirement and disability benefits.
• Medicare Tax: Supports healthcare for individuals aged 65 and older.
• Federal Unemployment Tax (FUTA): Paid by employers to fund unemployment compensation programs.
• State Unemployment Tax (SUTA): Employer-paid tax supporting state-level unemployment benefits.
• Federal Income Tax Withholding: Deducted from employee wages based on IRS Form W-4 information.
• State and Local Income Taxes: Vary by location; withheld and remitted by employers where applicable.

Taxes Paid by Both Employers and Employees

Certain payroll taxes are shared equally between employers and employees:

• Social Security Tax: 6.2% each (total 12.4%) up to the annual wage base limit.
• Medicare Tax: 1.45% each, with an additional 0.9% surtax for employees earning above the IRS threshold.

Employers must match the employee’s contribution and remit both portions to the IRS.

Taxes Paid by Employers Only

Employers are solely responsible for paying:

• Federal Unemployment Tax (FUTA)
• State Unemployment Tax (SUTA)
• Employer-paid state disability or workforce development taxes (in certain states)

These contributions are not deducted from employee paychecks but are part of the employer’s total tax liability.

Taxes Withheld from Employees Only

Employees bear full responsibility for:

• Federal Income Tax – withheld based on earnings and tax bracket.
• State and Local Income Taxes – where applicable, based on residence or workplace location.
• Additional Medicare Tax – applies to high-income earners.

Employers must accurately withhold and remit these taxes to remain IRS-compliant.

How Performance Bonuses Are Taxed

Performance bonuses are considered supplemental wages and are fully taxable under U.S. payroll tax laws. Employers may use one of two IRS-approved methods:

• Flat Rate Method: A flat withholding rate (currently 22%) applied to bonus payments.
• Aggregate Method: Bonuses are added to regular wages and taxed according to the employee’s total income bracket.

Bonuses are subject to Social Security, Medicare, and federal income tax withholding, just like regular wages.

Who Pays Payroll Taxes?

Both employers and employees contribute to payroll taxes. Employers handle:

• Withholding taxes from employee wages
• Matching contributions for FICA (Social Security and Medicare)
• Paying employer-only taxes (FUTA/SUTA)
• Filing payroll tax returns and remittances on time

Employees pay their share through wage withholdings automatically deducted from each paycheck.

Penalties for Non-Compliance

Failure to withhold, deposit, or report payroll taxes accurately can lead to serious IRS penalties, including:

• Failure-to-Deposit Penalties: Up to 15% of unpaid tax amounts.
• Interest Charges: On late or underpaid taxes.
• Trust Fund Recovery Penalty: Personal liability for company officers who fail to remit withheld taxes.
• Criminal Prosecution: In cases of intentional evasion or fraud.

Maintaining accurate payroll records, timely deposits, and compliance with IRS guidelines is critical to avoid financial and legal consequences.