To calculate payroll taxes, start with each employee’s gross wages for the pay period, subtract any pre-tax deductions to get taxable wages, and then apply each tax separately: federal income tax withholding based on the employee’s Form W-4, Social Security at 6.2% up to the annual wage cap, Medicare at 1.45% on all wages (plus an extra 0.9% once the employee crosses $200,000 in the year), your matching 6.2% and 1.45% as the employer, federal unemployment tax at an effective 0.6% on the first $7,000 of wages, and any state or local taxes that apply. The federal employer-side minimum for 2026 is 7.65% on wages plus a small FUTA amount, before state taxes enter the picture.
What You Need Before You Run the Numbers
Every calculation depends on a current Form W-4 from the employee. The W-4 tells you their filing status, any dependent credits, and any extra withholding they’ve asked for. Collect one at hire, and accept updated versions whenever an employee’s situation changes.1Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
Next, add up gross wages for the period: hourly pay, salary, overtime, commissions, and bonuses. Then subtract pre-tax deductions before applying most payroll taxes. Traditional 401(k) contributions and health insurance premiums paid through a Section 125 cafeteria plan both reduce the taxable wage base.2Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans What remains is the figure you feed into the calculations below.
Federal Income Tax Withholding
Federal income tax withholding follows IRS Publication 15-T, which offers two methods.3Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods The Wage Bracket Method uses lookup tables: find the row matching the employee’s adjusted wage range, read across to the withholding amount. It works well when you run payroll by hand for a small team. The Percentage Method uses formulas, which is why most payroll software relies on it.
The amount you withhold depends on three inputs: the employee’s filing status from the W-4, your pay frequency (weekly, biweekly, semimonthly, or monthly), and the adjusted wage amount after any credits or deductions the W-4 claims. Federal income tax withholding comes entirely out of the employee’s pay. There is no employer match.
Use the current year’s Publication 15-T. Running numbers against last year’s tables produces wrong withholding and leaves employees over- or under-paid when they file.
Bonuses and Other Supplemental Wages
Bonuses, commissions, and other supplemental wages can be withheld at a flat 22% for federal income tax, provided you pay them separately from regular wages or identify them as a distinct amount on the same check. Once an employee’s supplemental wages exceed $1 million in a calendar year, the excess is withheld at 37%.4Internal Revenue Service. Publication 15 (Circular E), Employer’s Tax Guide Most small businesses use the flat rate for bonuses rather than running them through the regular withholding tables.
Social Security and Medicare (FICA)
FICA is the tax most people picture when they hear “payroll tax.” It funds Social Security and Medicare, and unlike federal income tax, it requires a matching contribution from you as the employer.
Social Security
The Social Security tax rate is 6.2% on the employee and 6.2% on the employer, for a combined 12.4%.5Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax6Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax For 2026 the tax applies only to the first $184,500 of each employee’s wages.7Social Security Administration. Contribution and Benefit Base Once year-to-date earnings hit that cap, stop withholding Social Security for the rest of the calendar year. An employee earning exactly the cap has $11,439 withheld, and you pay a matching $11,439.
Track year-to-date earnings carefully. If an employee joins you mid-year from another job, apply the cap independently based on what you have paid them; the new employer has no way to know what the prior employer withheld, and the employee reconciles any overpayment on their personal return.
Medicare
Medicare is 1.45% on the employee and 1.45% on the employer, with no wage cap. Every dollar of earnings is taxed.5Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax6Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax
Once you’ve paid an employee more than $200,000 in a calendar year, you must withhold an Additional Medicare Tax of 0.9% on the excess, regardless of the employee’s filing status. The employee’s actual filing-status thresholds ($200,000 single, $250,000 married filing jointly, $125,000 married filing separately) get sorted out on their personal return. There is no employer match on the 0.9%; the full amount is the employee’s.8Internal Revenue Service. Additional Medicare Tax
A Worked FICA Example
For most employees, total FICA withholding is 7.65% of taxable wages (6.2% Social Security plus 1.45% Medicare), and you pay a matching 7.65%. On a $60,000 salary that’s $4,590 withheld from the employee and $4,590 out of your own pocket, for a combined $9,180 in FICA on that employee alone.
Federal Unemployment Tax (FUTA)
FUTA funds the federal unemployment system and is paid entirely by the employer. Never deduct it from wages. The statutory rate is 6.0% on the first $7,000 of each employee’s annual wages.9Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax10Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Almost no employer actually pays 6.0%. If you pay your state unemployment taxes on time, you receive a credit of up to 5.4%, dropping your effective FUTA rate to 0.6%.11Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax At 0.6%, the maximum FUTA per employee is $42 per year ($7,000 × 0.006). Once you’ve paid an employee $7,000 in a year, FUTA stops for that person.
Some states carry outstanding federal loans for unemployment benefits and haven’t repaid them within the required window. Employers in those states lose part of the 5.4% credit, which raises the effective FUTA rate. For 2026, California and the U.S. Virgin Islands face potential credit reductions, with California possibly seeing 1.5% or more depending on whether it receives a waiver of the benefit cost rate add-on. Final determinations come after November 10 of the tax year, so check the Department of Labor’s annual credit reduction list before filing Form 940 if you operate in an affected state.
State and Local Payroll Taxes
State unemployment insurance (SUI) is the state counterpart to FUTA, and it varies widely. The taxable wage base alone ranges from $7,000 in some states to nearly $70,000 in others. Your rate within a state’s range depends on your industry and claims history; new employers usually start at a default rate until enough experience is built to assign a tailored one. Rate notices for the coming year typically arrive in the last quarter of the current one.
Many states and some cities also levy their own income tax that you withhold from paychecks. A handful of municipalities charge a flat occupational tax or a per-employee head tax. Because these obligations are set locally, verify withholding requirements with each jurisdiction where your employees actually work.
When an employee lives in one state and works in another, figure out which state gets the withholding. About half the states have reciprocal agreements with at least one neighbor that let employees pay income tax only to their home state. If a reciprocal agreement applies, the employee files an exemption certificate with you and you withhold only for the home state. Without an agreement, you generally withhold for the work state, and the employee claims a credit on the home state return to avoid double taxation. Remote work has made this messier; check each state’s rules on how many workdays trigger a withholding obligation.
Depositing What You’ve Withheld
Calculating the tax is only half the job. You then have to deposit it with the IRS on schedule. The IRS puts you on either a monthly or semiweekly deposit schedule based on your total employment tax liability during a four-quarter lookback period. Report $50,000 or less in that period and you deposit monthly, by the 15th of the following month. Report more than $50,000 and you deposit semiweekly, within a few business days of each payday.12Internal Revenue Service. Topic No. 757, Forms 941 and 944 – Deposit Requirements
Deposits must be made electronically, either through the Electronic Federal Tax Payment System (EFTPS) or an equivalent electronic method such as an ACH credit through your bank.13Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System You then reconcile deposits by filing Form 941 each quarter. Employers with $1,000 or less in annual employment tax liability may qualify to file Form 944 once a year instead.14Internal Revenue Service. Topic No. 758, Form 941 and Form 944
FUTA is reported annually on Form 940. If your FUTA liability for a quarter exceeds $500, deposit it by the end of the month after that quarter. If it’s $500 or less, carry it forward to the next quarter or pay it with the annual return.
Missing a deposit deadline gets expensive fast. The failure-to-deposit penalty runs 2% of the unpaid deposit if you’re 1 to 5 days late, 5% at 6 to 15 days, and 10% beyond 15 days. If the deposit is still unpaid more than 10 days after the IRS issues its first notice, the penalty rises to 15%. Each late deposit is penalized individually, so chronic lateness compounds.15Internal Revenue Service. Failure to Deposit Penalty
None of This Applies to Independent Contractors
The calculations above cover employees only. You don’t withhold income tax, don’t pay FICA, and don’t owe FUTA on payments to workers properly classified as independent contractors. Misclassification is a common and costly mistake: getting it wrong, even by accident, exposes you to back taxes, penalties, and interest on every dollar you should have withheld. The IRS weighs behavioral control, financial control, and the nature of the relationship to make the call, with no single factor decisive.16Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
Why Getting the Withholding Right Is Personal
The federal income tax and the employee’s share of FICA that you withhold are trust fund taxes. They were never your money. If a business fails to remit them, the IRS can assess the Trust Fund Recovery Penalty, equal to 100% of the unpaid amount, personally against any “responsible person” who willfully failed to pay them over.17Office of the Law Revision Counsel. 26 US Code 6672 – Failure to Collect and Pay Over Tax
A responsible person is anyone with authority over the business’s financial decisions: owners, officers, partners, and even employees who control which bills get paid. “Willfully” doesn’t require intent to defraud. Knowing the taxes were due and choosing to pay rent or suppliers instead qualifies.18Internal Revenue Service. Trust Fund Recovery Penalty The penalty pierces the corporate veil, so an LLC or corporation won’t shield you. If cash flow ever gets tight, payroll taxes are the last bill to skip.