Payroll Tax

Payroll Tax Definition

Payroll taxes are taxes levied on wages and salaries that fund government programs like Social Security, Medicare, and unemployment insurance. Both employers and employees pay payroll taxes — the employer withholds the employee's share from their paycheck and also pays a matching employer share. Together, these make up FICA (Federal Insurance Contributions Act) taxes.

Payroll Tax in Practice — Example

A yoga studio pays an instructor $4,000 per month. Each pay period, the studio withholds 6.2% ($248) for Social Security and 1.45% ($58) for Medicare from the instructor's pay. The studio also pays a matching $248 and $58 from its own funds. Total payroll tax on that $4,000: $612 — half from the employee, half from the employer. The studio remits the full amount to the IRS based on its deposit schedule.

Why Payroll Tax Matters for Your Books

Payroll taxes are non-negotiable. They're mandatory from your first payroll, and the penalties for getting them wrong are steep. Understanding how they work is fundamental to running a business with employees.

The employer's share of payroll tax is an additional cost above wages. When you budget for a $50,000/year employee, the actual cost is closer to $53,825 after the employer's FICA contribution. Factor this in when making hiring decisions or setting project rates.

Beyond FICA, employers also pay federal unemployment tax (FUTA) at 6% on the first $7,000 per employee (usually reduced to 0.6% with state credits) and state unemployment tax (SUTA), which varies by state and your claims history. These add-ons are easy to forget in budgeting.

How Payroll Tax Shows Up in QuickBooks

In QuickBooks Online with Payroll, payroll taxes are calculated and tracked automatically. The employer's share appears as an expense on the Profit and Loss report under Payroll Taxes. The withheld employee amounts appear as payroll liabilities on the Balance Sheet. Run the Payroll Tax Summary report to see total tax obligations by type and period. QBO Payroll can auto-file and auto-pay federal and most state taxes for you.

Common Mistakes

Forgetting the employer match — you owe the same FICA percentage as your employees; budget for it

Missing deposit deadlines — the IRS imposes penalties starting at 2% for deposits 1-5 days late, escalating to 15%

Misclassifying employees as contractors — contractors don't have payroll tax withholding, so misclassification means back taxes, penalties, and interest

FAQ

Q: What's the current payroll tax rate? A: As of 2026, FICA is 7.65% for both employer and employee (6.2% Social Security + 1.45% Medicare). There's an additional 0.9% Medicare surtax on employee wages over $200,000 — employer doesn't match that.

Q: Do I pay payroll tax on contractor payments? A: No. Independent contractors handle their own self-employment taxes. You don't withhold or match payroll taxes for 1099 workers.

Related Terms

Payroll Expense

Payroll Liability

Tax Liability

Schedule C

Sales Tax

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