At cocktail parties, holiday gatherings, and social situations of all kinds, taxes always seem to come up in conversation. Yet for a topic that’s discussed as frequently as the weather, taxes are surprisingly misunderstood. From how they’re calculated to what they actually do, payroll taxes can be quite the enigma. However, taxes aren’t always as mysterious as they seem!
For many businesses, navigating the ins and outs of payroll tax can feel confusing, stressful, and overwhelming – and for good reason. Payroll tax involves complicated calculations, important federal regulations, and a never-ending parade of ever-changing policies – and your employees are counting on you to get it right.
Fortunately, the fundamentals of payroll tax are actually fairly straightforward. Let’s take a closer look at the basics of payroll taxes – and what you can do to simplify the process.
Why are Payroll Taxes Important?
Contrary to popular belief, “tax” is not a dirty word. True, most of us don’t exactly love seeing tax deductions applied to our paychecks – but the truth is that without them, our quality of life would be drastically different.
Essentially, payroll taxes are the foundation of our collective safety net. Government programs like Social Security, Medicare, and unemployment insurance are all largely dependent on the taxes we pay through our payroll checks. And if you aren’t currently using these types of government programs, you still benefit from payroll taxes every day. From the roads we drive on and the parks we play in to the schools our kids attend, our taxes help to support our quality of life and enhance our sense of security.
What are Payroll Taxes?
Payroll taxes come in a variety of flavors, and each requires its own specific calculation:
Federal Taxes:
Federal Income Tax (FIT) refers to taxes paid to the IRS, generally by employers on behalf of their employees. In the United States, almost anyone who earns income is required to pay federal taxes. Exactly how much is determined by how much the employee earns and information they report on their Federal W-4 Form. Employees or independent contractors who are not paid through a traditional paycheck must pay their Federal Income Tax directly to the IRS on a quarterly basis.
Social Security Tax:
Unsurprisingly, Social Security Tax refers to taxes that support the federal Social Security program. Both employers and employees pay into Social Security, with each paying 6.2% of the employee’s wages for a total of 12.4% (up to a certain limit).
Medicare Tax:
Like Social Security Tax, both employees and employers pay Medicare Tax on the employee’s wages. Currently, both parties contribute 1.45% of all wages, with an additional 0.09% for “high earners.”
Federal Unemployment Tax (FUTA):
Federal Unemployment Tax (otherwise known simply as FUTA) is paid by employers to fund unemployment benefits for workers who have lost their jobs. For 2025, the FUTA rate is 6% of the first $7,000 that the business pays to each employee each year.
State and Local Taxes:
State and local taxes depend on your location, and can include taxes due to your business’s state, city, or municipality. The employee may also be subject to certain local taxes depending on their city and state of residence.
Employer Responsibilities
In addition to the accurate and timely processing of payroll taxes, employers must also submit withheld taxes and their share of payroll taxes to federal and state tax agencies on a regular schedule. You’ll also need to file quarterly and annual payroll tax returns and supply employees with Form W-2 by January 31st each year.
Payroll Taxes: Simplify the Process
With a basic understanding of payroll taxes and regulations, your business is well on its way to success! Still, many businesses prefer to streamline the process with a modern payroll platform like Primepoint.
With a dynamic and customizable payroll platform, your business can implement customized payment schedules, manage benefits, and calculate taxes automatically – so you’re free to focus on what your business does best!
Want to learn more about how Primepoint can help simplify your processes? Click here!