​How to Calculate Payroll Taxes

Time is your most valuable asset as a small business owner. Spending countless hours trying to decipher payroll tax regulations is not only frustrating but also a drain on your productivity. The intricacies of FICA, FUTA, SUTA, and ever-changing withholding requirements can quickly consume your day.

We'll provide clear, step-by-step instructions and practical tips to streamline your payroll process, ensuring accuracy and compliance without sacrificing your valuable time. From demystifying W-4 forms to understanding the nuances of employer and employee contributions, we'll tell you how to calculate payroll taxes.

What Are Payroll Taxes?

Payroll taxes include the tax deductions taken from an employee’s paycheck by the employer, including federal, state, and local income taxes, as well as Social Security and Medicare taxes.

In addition to withholding these taxes, employers are also responsible for contributing payroll taxes on behalf of each employee. This includes the employer's portion of Social Security and Medicare taxes, federal and state unemployment taxes, and any applicable local payroll tax obligations. Before we dive into the calculations, let’s first break down these payroll taxes for employers and employees.

Payroll Taxes for Employers

These are taxes that you, as the employer, are responsible for paying per employee. Accurate and timely payment of these employer-side taxes is essential for avoiding penalties and maintaining good standing with tax authorities.

• Federal Insurance Contributions Act: Also known as FICA, these include Social Security and Medicare taxes.

• Federal Unemployment Tax: Also known as FUTA, these are taxes that fund federal unemployment programs.

• State Unemployment Tax Act: Also known as SUTA, these are state-specific unemployment benefits. You may have also heard this referred to as State Unemployment Insurance or SUI.

• Applicable state and local taxes: Some states and cities require additional employer taxes, so be sure to check your employee’s work and residence locations for any applicable contributions.

Payroll Taxes for Employees

Understanding these withholdings ensures you're fulfilling your role as a responsible employer and maintaining accurate records. While these taxes are employee-paid, you are responsible for withholding the contributions and submitting them on their behalf.

• FICA: Same as employers, these include the Social Security and Medicare taxes.

• Federal income tax: Federal income tax is taken from all taxable compensation including wages, salaries, commissions, and bonuses. The amount of tax is based on their filing status (more on this below!).

• State income tax: Similar to federal income taxes, this is based on the employee’s income and filing status. However, not all states have income tax, so be sure to check each state’s requirements before calculating.

• Local city tax: This is not always applicable, but certain cities have additional income taxes required to be paid by the employee.

• SUTA: While this is mainly an employer-only tax, some states require employees also to pay into their state-based unemployment tax program. As of 2025, these states include Alaska, New Jersey, and Pennsylvania.

It’s important to remember that these payroll taxes are for W-2 employees only, since you’re not required to pay taxes on payments to independent contractors.

How to Calculate Payroll Taxes Per Employee

To calculate accurately, you’ll need to know the contribution percentages for each tax. It’s important to stay updated on these amounts since they can change annually.

FICA Contributions

Employees and employers share FICA taxes equally, with each splitting the total contribution requirement per paycheck. Here’s how FICA tax deductions for payroll should be structured:

• Total Social Security Contribution Requirement: 12.4%

  • Employer Contribution: 6.2%

  • Employee Contribution: 6.2%

• Total Medicare Contribution Requirement: 2.9%

  • Employer Contribution: 1.45%

  • Employee Contribution: 1.45%

• Total Additional Medicare Tax Requirement: 0.9%, when employee exceeds threshold amount

  • Employer Contribution: 0%

  • Employee Contribution: 0.9%

While these are the baseline payroll tax rates, it’s important to track each employee’s taxable income, as certain taxes are subject to wage base limits:

• Social Security: For 2025, Social Security Tax has a wage base of $176,100, meaning the employer and employee contributions stop after the employee reaches this amount in earnings.

• Medicare: Unlike Social Security, there is no wage base limit for Medicare taxes. In fact, employees who earn over $200,000 in the calendar year have to pay an additional Medicare Tax.

• Additional Medicare Tax: As of 2025, employees (only) are required to pay an additional 0.9% in Medicare tax once they reach $200,000 in taxable income.

FUTA Contributions

As of 2025, the FUTA payroll tax rate is 6.0%. However, most businesses will receive a 5.4% credit from the IRS meaning an effective tax rate of only 0.6% applied to the first $7,000 in employee wages during the calendar year.

SUTA Contributions

The SUTA rate and applicable wage base differ by state, so you’ll need to consult the employee’s state’s unemployment agency for the right calculations per pay period.

Federal Income Tax

Federal income tax is different for every employee, since it depends on their filing status, exemptions, income bracket, and tax credits. To know how to calculate these taxes, you’ll need every employee to complete a Form W-4, also known as the Employee’s Withholding Certificate, and then use IRS Publication 15-T.

What Is a Form W-4?

A Form W-4 determines how much federal tax should be withheld from an employee’s paycheck each pay period. While employees aren’t required to complete one annually, they should submit an updated Form W-4 if their financial or personal situation changes (like a change in filing status).

Form W-4 is generally for federal income tax purposes. Some states utilize W-4 for state withholding purposes as well, while other states have their own withholding forms. You'll need to be sure these are also completed to withhold the correct amount from the employee's paycheck.

Additional State and Local Taxes

Some states and cities require additional tax withholdings. For example, employees residing in one of New York City’s five boroughs must pay an additional NYC Personal Income Tax. This tax is based on the employee’s income, with the payroll tax rate ranging from 3.078% to 3.876%, for 2024 filings. Make sure to reach out to the local tax offices to confirm that you’re withholding all the applicable taxes on behalf of your employees.

Submitting Payroll Taxes

Now that you know how to calculate and withhold various employer and employee payroll taxes, let’s discuss how to file them. Due dates depend on your business’s specific circumstances, so it’s best to refer to IRS Publication 15 to confirm your deposit schedule and review their policies—typically, deposit schedules are monthly or semi-weekly.

Payroll Tax Forms

Each form serves a specific purpose in reporting and remitting payroll taxes:

• Form 941: This form, also known as the Employer's Quarterly Federal Tax Return, is used to report the income taxes, Social Security tax, and Medicare tax you withheld from employees’ paychecks. It's also used to pay your portion of Social Security and Medicare taxes. It’s filed on a quarterly basis.

• Form 940: This is also known as the Employer's Annual Federal Unemployment Tax Return and is used to report your FUTA taxes for the year. This form is filed annually, no later than January 31st, for the previous year.

• Form W-2: Also known as a Wage and Tax Statement, Form W-2 reports wages, salary, and other compensation paid to employees, along with their tax withholdings for the year. This form must be filed annually and is due to both the Social Security Administration (SSA) and the employee by January 31st, for the previous year.

• Form W-3: Also known as the Transmittal of Wage and Tax Statements, Form W-3 contains the aggregated totals of your company’s W-2 forms. For companies issuing more than one W-2, a Form W-3 must accompany Copy A of your W-2 filing with the Social Security Administration (SSA).

To file these forms, you can send them electronically through the IRS e-file system or use their list of authorized IRS e-file providers.

How Justworks Can Help Calculate Payroll Taxes

Running a small business can be stressful, and knowing how to calculate payroll taxes can make it much more complicated. At Justworks, we help you stay compliant and on-time with your payroll taxes.

Our software automatically deducts the correct tax contributions per paycheck and stays up to date on tax rates to ensure compliance. We also handle the reporting and remitting process for stress-free tax filing. This way, you can focus on running your business with one less task to worry about.

Ready to learn more about how Justworks can help you free up time to spend on growing your business? Get started with Justworks today.