Payroll tax: is any tax calculated on wages paid to employees. It includes taxes the employer withholds from pay, such as federal income tax and the employee share of FICA, and taxes the employer pays on its own, such as its FICA match, FUTA, and state unemployment tax.
Key takeaways
- Withheld taxes come out of the employee's pay; employer taxes are an extra cost on top of wages.
- Employer-side payroll taxes add at least 7.65% to wages, plus unemployment taxes.
- Deposit schedules depend on your total tax liability and can be monthly or semi-weekly.
- Withheld taxes are trust fund taxes, and failing to deposit them can create personal liability.
How payroll tax works
Payroll tax has two halves. The first is money you withhold from employees and pass to government agencies: federal income tax, the employee's 7.65% FICA, state and local income taxes, and, in a few states, employee-paid unemployment or disability taxes. The second is your own employer tax: the matching 7.65% FICA, FUTA, SUTA, and in some places local payroll or transit taxes.
The IRS assigns each employer a deposit schedule based on its lookback period. If you reported $50,000 or less of employment taxes in that period, you're a monthly depositor and pay by the 15th of the following month. Above that, you're a semi-weekly depositor. Any day you accumulate $100,000 or more triggers a next-business-day deposit (IRS Publication 15 (Circular E), Employer's Tax Guide). Quarterly totals go on Form 941, annual unemployment on Form 940, and each employee's figures on the W-2.
Payroll tax example
A company pays one employee $5,000 in gross wages for a month in a state with a 3% state income tax, a 2.7% SUTA rate, and the employee still under the FUTA wage base.
| Tax | Withheld from employee | Paid by employer |
|---|---|---|
| Federal income tax (from W-4) | $420.00 | none |
| Social Security, 6.2% | $310.00 | $310.00 |
| Medicare, 1.45% | $72.50 | $72.50 |
| State income tax | $150.00 | none |
| FUTA, 0.6% | none | $30.00 |
| SUTA, 2.7% | none | $135.00 |
| Total | $952.50 | $547.50 |
The employer's real cost for this month is $5,547.50 before benefits. Federal income tax is illustrative.
Why payroll tax matters for employers
Payroll tax mistakes are some of the most expensive errors a small business can make, because penalties stack: failure to deposit, failure to file, and interest. The trust fund recovery penalty can make anyone responsible for withholding personally liable for 100% of the unpaid employee share.
Payroll taxes also drive budgeting. Compensation costs for private employers grew 3.3% in the year to June 2026, with benefits costs, which include employer payroll taxes, up 3.8% (BLS, compensation cost growth to June 2026). Finance teams that budget only salary underestimate headcount cost every time.
This is the main reason companies buy payroll software or outsource to a PEO. Automated deposits and filings remove the most common failure point: someone forgetting a deadline.
Common payroll tax mistakes to avoid
Using the wrong deposit schedule
Your schedule is set by the lookback period each year, not by how often you run payroll.
Treating workers as contractors to skip payroll tax
Misclassification brings back taxes, penalties, and interest. Our employee vs contractor guide explains the tests.
Paying net wages when cash is tight and skipping deposits
This is the classic trust fund failure, and the IRS pursues it aggressively.
Forgetting local taxes
Cities and counties in states such as Ohio, Pennsylvania, and Kentucky levy their own payroll or income taxes.
Payroll tax: questions people also ask
What taxes are payroll taxes?
How much are employer payroll taxes?
Who is responsible for paying payroll taxes?
What happens if payroll taxes are paid late?
Is payroll tax the same as income tax?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>Payroll tax is any tax calculated on wages paid to employees. It includes taxes the employer withholds from pay, such as federal income tax and the employee share of FICA, and taxes the employer pays on its own, such as its FICA match, FUTA, and state unemployment tax.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/payroll-tax/">HRTally HR Glossary, Payroll tax</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.