All businesses must follow state and federal rules and regulations to maintain payroll compliance. One of these federal rules deals with taxes. As soon as a business hires its’ first employee, it begins its’ responsibility of paying payroll taxes. These taxes are governed by the Internal Revenue Service.
In this article, we will take a look at the payroll taxes that businesses must pay when paying employees. By the time you have finished reading, you should feel comfortable with your obligations and be able to understand where the taxes are going. Let’s take a look at what kind of payroll taxes businesses are responsible for.
What payroll taxes businesses are responsible for:
As a business owner with employees, you will be responsible for two things when it comes to payroll taxes:
- First, you must deduct a portion of your employees pay to pay the tax liability on their behalf. This includes:
- federal income tax and state income tax (where applicable) based on your employees W-4 form selections,
- the employee portion of Social Security and Medicare taxes, and
- any state or local tax that is legally required.
- paying the company share of payroll taxes on each employee. This includes:
- matching the social security and Medicare taxes,
- state and federal unemployment taxes, and
- any state or local tax that is legally required.
Overall, most small businesses pay an average of 10% of employee wages in required payroll taxes on top of the wages they pay to employees. These taxes are divided up and cover a number of items.
FICA (Social Security & Medicare) Taxes
The Federal Insurance Contribution Act, or FICA, began in the 1930s and is a law that states employees and their employers must make contributions to Social Security and Medicare programs. This Social Security & Medicare tax is shared by an even 50/50 split between the employer and the employee. The current total rate for this tax is 15.3% of employee wages. The social security portion is currently 12.4%. Employees and employers each contribute 6.2% of wages to social security tax. Social security tax is only on wages up to a certain threshold each year ($176,100 for 2025).
The current Medicare portion of this tax is 2.9%. Employees and employers each contribute 1.45% of wages to Medicare tax. Medicare tax is on all wages, as there is no maximum threshold. Employers are responsible for withholding a 0.9% additional Medicare tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status. An employer is required to begin withholding additional Medicare tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There’s no employer match for the additional Medicare tax.
Unemployment Taxes
There are two different types of unemployment taxes. They are:
- Federal Unemployment Tax
- State Unemployment Tax
Federal Unemployment
The Federal Unemployment Tax, or FUTA, covers a portion of unemployment benefits at the federal level. Businesses are required to pay the full amount of this tax. The current federal unemployment tax rate is 6% on only the first $7,000 of wages paid to employees in a calendar year. However, because there are state tax credits in play in most states, businesses usually only end up paying 0.6% of employee wages to federal unemployment benefits.
State Unemployment
State Unemployment Tax, or SUTA, funds the unemployment trust run by each state. Each employer is “rated” by the state and issued an unemployment tax rate annually to contribute on behalf of each employee. For the state of Maine, unemployment tax is paid only on the first $12,000 in wages. The individual rate varies by company; however, the “new employer rate” for 2025 is 2.41% of wages.
State and Local Taxes
Some states or local municipalities have additional taxes on top of the standard income, FICA, and unemployment taxes. For example, in Maine, employers must withhold a payroll tax of 0.5% from employees to pay into the state Paid Family and Medical Leave program. Certain employers, those with 15 or more employees in any 20 weeks in Maine, must also pay a 0.5% employer tax into the PFML program. There are 12 other states that have a similar program, so it is key to check with your state for its’ particular tax obligations. Also, in addition to the PFML tax, there may be other tax requirements in certain states and municipalities, so be sure to check for your obligations in the area you are located.
It is also important to note where your remote employees, if any, are working. Your business is responsible for deducing employee taxes and paying the employer share of taxes in the state and municipalities where your employees are working, not just where your business is located. For example, if you are a Maine-based business but have a remote employee working in Massachusetts, you will have to pay payroll taxes into Massachusetts unemployment, and the employee would pay Massachusetts income and PFML taxes. Be aware of your remote employees and where they work.
Conclusion
Well, there you have it—an overview of payroll tax obligations and how they are broken down. At Paper Trails, we strive to keep business owners like you aware of all aspects of operating a business. If you have questions about payroll taxes or are worried about staying compliant with these rules, get started with us today!