EMPLOYEE AND EMPLOYER PAYROLL TAXES

Payroll taxes are taxes paid on wages or salaries that employees earn. Payroll taxes are paid
by both employers and employees.
Employees can usually be distinguished from other types of workers, like independent
contractors or self-employed individuals, based on the work, payment terms, and relationship
they have with their employer. Generally, if you offer a worker employment benefits,
withhold taxes from their paycheck, and set their work and payment terms, that person is
considered an employee of your organization.
Main Difference Between Employee and Employer Payroll Taxes
Even though payroll taxes are paid by both employers and employees, there’s one major
difference.
 Payroll taxes paid by employees affect employees’ net pay, but payroll taxes paid by
employers don’t.
 Taxes that employees pay are subtracted out of an employee’s gross pay, which
lowers the net pay for that paycheck while Payroll taxes paid by the employer do not
affect an employee’s paycheck.
Payroll Taxes That Both Employees and Employers Pay
Both employers and employees pay FICA tax ( Federal insurance contribution Act), or Social
Security and Medicare taxes, as a result of the Federal Insurance Contributions Act. It’s a 50-
50 split.
Social Security tax
The 2023 Social Security tax is 12.4%; that’s 6.2% for employers and 6.2% employees (this
is unchanged from previous years).
This rate is applied to the first $147,000 your employee earns, so if your employee makes
more than that amount in a calendar year, there won’t be any Social Security taxes withheld
once they hit that wage base limit.
Medicare tax
The Medicare portion of the FICA tax is 2.9% of gross wages, and it’s applied to every dollar
your employee earns. So, for this tax, it’s 1.45% that you pay, and 1.45% that your employee
pays.
A. Employee Payroll Taxes
The employee payroll taxes are as follows:
Federal income tax
This tax is paid by employees only and is calculated based on their total income, filing status,
and personal exemptions.
To calculate the income tax withholding amount for each employee’s paycheck, use their
Form W-4 and the IRS employer withholding tables or run payroll through a payroll
software.

State income tax

Most states collect income tax, too.
A state income tax is a tax on income earned in that state. It is like a federal income tax, but
state income tax generally funds state budgets rather than the federal government.
New York and California typically have the highest rates, but it can vary by year. On the
other end of the spectrum, Alaska, Florida, Nevada, South Dakota,
Tennessee, Texas, Washington, and Wyoming don’t have a personal income tax on wages.
B. Employer Payroll Taxes
Here are the taxes that only employers, not employees, pay when it comes to payroll.
Federal unemployment taxes (FUTA)
The Federal Unemployment Tax Act, or FUTA for short, is there to provide a buffer for
people who have recently lost their jobs.
Employers must pay 6% toward FUTA, though companies who pay their state unemployment
taxes on time can receive a tax credit up to 5.4% towards their FUTA tax rate. The FUTA tax
rate usually equals 0.6% of all taxable wages up to the first $7,000 earned for each employee.

Just like FUTA, state unemployment insurance (SUI) taxes are paid by employers as a safety
net for people who lost their job through no fault of their own and are actively looking for a
new gig.
Nearly every state has a different tax rate, which is usually determined by the type of
business you have and your history with unemployment claims. Head over to the US
Department of Labor’s state law website to learn more about your rate.
If you are based in Alaska, New Jersey, or Pennsylvania, you also withhold an employee
contribution of SUI taxes.
The difference is that employees pay income tax at the state and federal level, while
employers pay unemployment tax at the state and federal level.

ILLUSTRATION TABLE:
 EMPLOYER PAYS EMPLOYEE PAYS TOTAL WAGE CAP

Social Security 6.2% 6.2% 12.4% $160,200

Medicare 1.45% 1.45% 2.9% No limit

State Unemployment Variable None Variable Variable

Federal
6.0% None 6.0% $7,000
Unemployment

Employees' taxes and deductions play a significant role in payroll management and impact
both employees and employers. Let's break down each component: