Payroll Taxes Explained

Payroll taxes include both taxes withheld from employees' pay and taxes paid directly by employers. In simple terms:

• •Federal income tax — Withheld from employee pay based on withholding allowances and tax brackets. Employers remit these amounts to the IRS.
• •Social Security tax — A percentage of wages (up to an annual wage base) withheld from employees; employers pay a matching amount.
• •Medicare tax — A percentage of wages withheld from employees; employers pay a matching amount. Higher earners may have an additional Medicare tax.
• •Federal unemployment tax (FUTA) — Paid by employers (not withheld from employees) to fund unemployment benefits. Rates and wage bases are set by federal law.
• •State payroll taxes — Often include state income tax withholding (where applicable), state unemployment tax, and sometimes local or disability taxes. Rules vary by state.

Employers are responsible for:

• •Matching Social Security and Medicare taxes — For each employee, employers pay a matching portion of FICA (Social Security and Medicare). The combined employee and employer rates are set by law; the employer remits both the withheld amount and the employer share.
• •Federal unemployment tax (FUTA) — Paid by the employer on wages up to the federal wage base. FUTA is not withheld from employee pay.
• •State unemployment taxes — Most states levy unemployment tax on employers. Rates and wage bases vary by state and often by employer experience (e.g. layoff history).

Employer payroll tax rates and wage bases depend on state and workforce size. Payroll software applies current rates and keeps track of wage bases so you don't have to look them up each pay run.

Employers withhold the following from employee wages (where applicable):

• •Federal income tax withholding — Based on the employee's W-4 and tax brackets. The employer remits withheld amounts to the IRS.
• •Social Security tax — A set percentage of wages, up to the annual wage base. Withheld from pay and remitted with the employer match.
• •Medicare tax — A set percentage of wages (and possibly an additional amount for higher earners). Withheld and remitted with the employer share.
• •State income taxes — In states that tax income, employers withhold state (and sometimes local) income tax based on state forms and rules.

Withholding is calculated each pay period; the employer holds the amounts and remits them to the IRS and state agencies on a set schedule. Accurate calculations matter: under-withholding can leave employees with a tax bill at year-end, and errors can lead to penalties for the employer.

Quarterly payroll tax filings — Federal Form 941 (employer's quarterly federal tax return) is typically due by the last day of the month after the end of each quarter. Tax deposits may be required monthly or semi-weekly depending on total liability. States have their own quarterly or other periodic filing and deposit schedules.

Annual forms — W-2s for employees are due to employees and the Social Security Administration by late January. 1099-NEC forms for contractors (when required) are also due in late January. Employers must file and furnish these on time to avoid penalties.

Employer reporting — Employers must keep records and file returns that reconcile wages paid, taxes withheld, and taxes paid. Missing a filing or deposit deadline can result in penalties and interest. Payroll software tracks deadlines and can file and deposit on your behalf.

W-2 employees — Employers have full payroll tax responsibilities: withhold federal and state income tax, Social Security, and Medicare; pay the employer share of FICA; and pay federal and state unemployment tax. Employers file quarterly and annual returns and make deposits. For more on how contractor businesses handle both employee and contractor pay, see our payroll for contractors guide.

1099 contractors — Contractors are not employees; you do not withhold payroll taxes from their pay. They are responsible for their own income tax and self-employment tax (Social Security and Medicare). You pay them a gross amount and, when required, issue 1099-NEC forms at year-end. Misclassifying employees as contractors can lead to back taxes and penalties, so classification must be correct.

Payroll software automates:

• •Payroll tax calculations — Applies current federal and state rates, wage bases, and withholding rules so each pay run has correct withholdings and employer taxes.
• •Tax withholding — Calculates federal and state income tax withholding from W-4 and state forms, plus FICA, so employees are withheld correctly.
• •Tax filing and payments — Files required returns (e.g. Form 941) and makes federal and state tax deposits on the required schedule. Full-service providers do this so you don't have to.
• •Year-end forms — Generates W-2s for employees and 1099-NEC for contractors (when applicable), and can file them with the IRS and state agencies.

Providers like Gusto, QuickBooks Payroll, OnPay, and Rippling offer automated tax calculation and filing. Our reviews detail how each handles multi-state, year-end forms, and compliance.

Many payroll platforms specialize in automated tax filing and stay current with rate and form changes. For a curated list of top picks and how they handle tax compliance, see our best payroll software roundup. When comparing options, look for full-service tax filing, multi-state support, and clear reporting so you can rely on the software to keep you in compliance.

Our comparison pages help businesses evaluate tax automation features—what's included, how filing and deposits work, and how each platform handles multi-state or year-end forms. Browse our payroll software comparisons hub, or jump to Gusto vs QuickBooks Payroll and Gusto vs OnPay to see how tax handling compares.