Whether you own a small business or a large-scale enterprise, payroll taxes are not just a responsibility but a legal obligation as an employer. Also, in most states, a progressive tax scheme is followed by eight income classes.

If you’re unfamiliar with payroll taxes, all of this can feel a little complex; however, we will break down and simplify the taxation process for you.

What are Payroll Taxes?

In simple terms, payroll taxes are a set amount that is withheld from the salaries of employees by the employer, along with the employer’s share of the tax, which is then paid to the government. This amount includes local, state, and federal taxes.

NOTE- Not all employment taxes are considered payroll taxes. Payroll taxes comprise FICA and self-employment tax.

What is FICA?

FICA, or the Federal Insurance Contributions Act, is a federal payroll tax that includes Social Security and Medicare Taxes.

Social Security Tax: These funds are shared by two trust funds, i.e., the Old-Age and Survivors Insurance (OASI) Trust Fund and Disability Insurance Trust Fund, for retirement and disability benefits, respectively.
Medicare Tax: Once again, the funds are shared by two trust funds: The Hospital Insurance Trust Fund (Medicare Part A) and the Supplementary Medical Insurance Trust Fund (Medicare Part B).

Medicare Part A covers hospital care and skilled nursing inpatient care, while Medicare Part B covers laboratory tests and screenings, outpatient care, x-rays, ambulance service, and other additional costs.

What are FICA tax rates?

Currently, the total withheld tax rate for Social Security is 12.4%, whereas the total withheld tax rate for Medicare is 2.9%

NOTE: You can check Social Security and Medicare withholding rates here.

What is Self-Employment Tax?

As the name suggests, these taxes are applicable to self-employed individuals. Interestingly, self-employed individuals must pay taxes for both employers and employees as stated under the Self-Employed Contributions Act (SECA).

How Do Payroll Taxes Work?

To simplify the process of payroll taxes, we have split this process into five easy steps.

Withholding Employee Salaries

The first step taken by the employer is to deduct federal, state, and local payroll taxes from their employee’s paychecks.

Employer Share Deduction

Following this, employers must contribute their share of payroll taxes. This includes both FICA and unemployment taxes. There are two types of unemployment taxes: SUTA and FUTA.

SUTA: The State Unemployment Tax Act is a required payroll tax, where money goes into the state unemployment fund.
FUTA: The Federal Unemployment Tax Act is another payroll tax requirement. It differs from SUTA, as the federal government controls FUTA, and it oversees and supports each state’s unemployment insurance programs.
Depositing and Reporting Taxes

The withheld amount must be deposited with the respective government agency, which is done bi-weekly or monthly, depending on the size of the organization.

Next, employers must file regular and detailed payroll reports like IRS Form 941 and NJ-927 (New Jersey Employer’s Quarterly Report). You can learn more about depositing and reporting the employment taxes here.

Compliance with State-Specific Taxes

Employers must also be aware of state-specific taxes and adhere to regulations. For instance, in New Jersey, employers must consider taxes like the Temporary Disability Insurance (TDI) tax and the Family Leave Insurance (FLI) tax.

NOTE: You can get more information on TDI and FLI taxes here.

Annual Reconciliation

At the end of each year, employers must provide W2 forms to their employees detailing their earnings and withholdings for that year. Learn more about W2 forms here.

If you’re unsure of how to file payroll taxes as a business or employer, Hudson & Empire is here to help. Our certified specialists can help you with payroll processing and payroll taxes while adhering to ever-changing regulations.

Common Payroll Tax Mistakes

Payroll taxes are complex; unsurprisingly, employers make few errors that can result in fines and penalties. Here are some of the most common payroll tax mistakes:

Incorrect Employee’s Name, Address, and/or Social Security Number

When reporting taxes, it is essential that you write the correct and full legal name of your employees. Also, their social security number and address must be correct as well.

Failing to do so can result in a $50 penalty for each incorrect information.

Not Filing Out Paperwork for New Hires

Employers must correctly fill out new employees' personal information for federal and state agencies. These are required for I-9 and W-4 forms.

Failing to do so can result in a $50 penalty for each incorrect W-2 form.

Not Reporting Taxable Wages on Employee’s W-2

During business audits conducted by federal or state agencies, if they identify any missed wages like cash bonuses, moving allowances, and non-business-related expenses, it can result in a hefty penalty to both the employee and employer.

Not Reporting the Correct State on Your Employees’ W-2

Employees working from a different state or frequently traveling due to work must be reported as per the state they are working from or traveling to.

Incorrect information can lead to delays in W-2 form submissions.

Applying Payroll Taxes to the Wrong Quarter

The date on the paycheck determines which quarter your tax payment goes towards. Applying the payment to the wrong quarter can result in notices from the IRS for underpaying or overpaying.

Depending on how long taxes have been misapplied, it can result in a massive amount of paperwork and time.

How to Avoid Common Payroll Tax Mistakes?

Filling out all the paperwork with correct information can be stressful. Moreover, if you have a large number of employees within your organization, keeping track of all the information can become complex.

Therefore, we highly recommend hiring professionals to ensure accurate payroll tax filing.

Wrapping It Up

Payroll taxes can be intimidating at first, especially if you’re not familiar with all the legalities. But once you understand the requirements and the process, it becomes easy.

While you can always use online payroll tax calculators, these are prone to human error. Therefore, we highly recommend outsourcing payroll processing, which includes filing payroll taxes.

Ready to simplify your payroll tax process? Contact Hudson & Empire today and let our experts handle the complexities, so you can focus on growing your business!

Frequently Asked Questions (FAQs)

What are Payroll Taxes levied on?

Payroll taxes are levied from employees’ paychecks and employers’ share of income.

Which is a kind of federal payroll tax?

FICA (Federal Insurance Contributions Act) is a federal payroll tax that includes Social Security and Medicare Taxes.

Do employees need to pay the total amount of FICA tax?

No. By federal law, employers are required to evenly split (6.2%) FICA tax with their employees. Only self-employed individuals need to pay FICA tax in its entirety.

Payroll Taxes Explained for Employers (2025)