Are you confused about employee and employer taxes? Here is a list of them all at the local, state, and federal levels.
Here's what you need to know:
- Payroll software can help you automate your federal, state, and local tax obligations
- If you have employees in other states, consider reciprocal tax agreements
- Certain employees and employers may be exempt from a specific type of tax
The word “tax” has an intimidating air, inciting fear in many who must pay it, including employers. While this trepidation from employers is sometimes overblown, it comes from a legitimate place — every company has employee and employer tax responsibilities and there are stringent costs for noncompliance.
However, compliance isn’t always clear-cut — not when employment taxes exist in so many forms. Without some type of guide or checklist, it can be tough to nail down your employment tax obligations.
To help you out, we created this central hub of employment taxes, including the taxes employers must withhold from employees’ wages and the employer’s own share of taxes.
Employee taxes: Federal
These are the federal employment taxes that employers must withhold from employees’ taxable wages.
Federal income tax
Give each new hire a W-4 Form to complete.This tax is based on the employee’s Form W-4 (e.g., their filing status and the number of dependents) and the Internal Revenue Service (IRS) tax withholding tables. It’s therefore essential that you give each new hire a Form W-4 to complete and return to you.
But what if the employee does not comply?
According to the IRS, “If an employee fails to give you a properly completed Form W-4, you must withhold federal income taxes from his or her wages as if he or she were single or married filing separately with no other entries on step 2, 3, or 4 of the Form W-4.”
Social Security tax
This tax is based on a percentage of taxable wages, up to the annual wage limit. For 2022, the Social Security tax withholding rate is 6.2% of the employee’s taxable wages, up to $147,000.
This tax is based on a percentage of taxable wages, but there’s no annual wage limit. For 2022, the Medicare tax withholding rate is 1.45% of all the employee’s taxable wages.
Additional Medicare Tax
If you pay more than $200,000 to an employee for the year, you must withhold an additional Medicare tax of 0.9% on the excess wages.
Employee taxes: State
Depending on your location, you may need to withhold the state taxes below from your employees’ wages.
State income tax
Most states require state income tax withholding, except the following:
- New Hampshire
- South Dakota
State unemployment tax
Most states do not require employees to pay state unemployment tax (SUTA). However, the following do:
- New Jersey
If your employees work in any of those 3 states, you must withhold SUTA tax from their taxable wages.
Only three states require employees to pay state unemployment tax.
State disability insurance (SDI) tax
Employers in these jurisdictions must offer their employees state disability insurance coverage:
- New York
- New Jersey
- Rhode Island
If your employees work in California, New Jersey, or Rhode Island, you must take SDI tax out of their wages.
Additional state taxes for employees
Depending on where your employees work, other state taxes may apply. For example, employers in Oregon must withhold transit tax from their employees’ wages.
Employee taxes: Local
Many local municipalities require employers to withhold local taxes from the wages of employees who work or live in the vicinity. This includes localities within these states:
- New York
These local taxes may take the form of a city, county, or district tax. Even if the locality does not levy an actual tax on employees, they may charge employees in another way. For example, certain cities in West Virginia require employers to withhold a city service fee from the wages of employees who work in the city.
Employer taxes: Federal
Social Security tax
Like your employees, you must pay your share of Social Security tax. For 2022, you pay 6.2% of taxable wages paid to each employee, up to the annual wage limit of $147,000.
You must also pay your share of Medicare tax, at the same rate as your employees – which is 1.45% of all taxable wages. Note that employers do not pay additional Medicare tax.
Federal unemployment tax
For 2022, the federal unemployment tax (FUTA) rate is 6% of the first $7,000 paid to each employee. You can take a maximum credit of 5.4% against your FUTA tax if you paid your SUTA tax on time. This decreases your FUTA tax rate to 0.6%.
Employer taxes: State
State unemployment tax
The majority of employers must pay state unemployment tax. Typically, an employer’s SUTA tax rate is based on a number of factors, such as:
- How long the employer has been in business
- The employer’s industry
- How many employees have drawn unemployment benefits on the employer’s account
Additional Employer Taxes (State)
Whether you must pay other state taxes depends on the state. For example, Texas imposes an additional Employment and Training Investment Assessment (ETIA) on employers who pay SUTA taxes in the state. Moreover, California charges employers an Employment Training Tax (ETT).
Employer taxes: Local
Usually, local income taxes are paid by the employee via payroll withholding. However, some localities impose a local tax on employers. For example, employers operating in Denver, Colorado must pay an occupational privilege tax.
Things to keep in mind
- Certain employees and employers may be exempt from a specific type of tax. However, these exemptions are the exception not the rule.
- Payroll software is designed to simplify your federal, state, and local employment tax obligations. The software handles tax calculations and filings.
- Employment taxes are withheld from taxable wages – meaning the employee’s wages that are subject to the tax in question.
- If an employee works in different states, be sure to consider any reciprocal tax agreements among those states.
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Where to get more information on employee and employer taxes
For information on federal employment taxes, see IRS Publication 15 and Publication 15-T.
For state employment tax information, you may contact the state agency that administers the tax. Depending on the type of tax, this may be the state revenue agency or the state workforce agency.
The state revenue agency may also be able to provide you with applicable local employment tax information. Or, you can contact the local taxation department directly.
We hope this checklist will give you some peace of mind when it comes to navigating the rocky road of employee and employer taxes.