Running payroll is about far more than issuing paychecks. Each payment triggers a series of tax obligations your business must manage with precision. Staying compliant with payroll tax rules isn’t just a legal requirement, it protects your company’s reputation and helps you avoid costly penalties. That’s why it’s so important to regularly revisit your core payroll tax responsibilities and make sure nothing slips through the cracks.
Federal, State and Local Taxes
Employers must withhold federal income tax from employees’ paychecks. The amount withheld from each person’s pay depends on these two factors:
- Wage amount.
- Information provided on the employee’s Form W-4, “Employee’s Withholding Certificate.”
Additional withholding rules may apply to commissions and other forms of compensation.
Be sure to stay aware of your non-federal payroll tax obligations. State income tax withholding rules, for example, applies to many employers. However, nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Certain localities also impose income taxes. And in some places, withholding is required to cover short-term disability, paid family leave or unemployment benefits. Partnering with a payroll provider like DM Payroll Solutions, which handles your local, state and federal payroll taxes, lets you stay focused on your business rather than stressing over complex national tax compliance.
Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA)
Under FICA, payroll taxes consist of two individual taxes.
- Social Security tax, which is 6.2% of wages up to an annually inflation-adjusted wage base limit. For 2026, that limit is $176,100 (up from $168,600 in 2025). Both the employee and employer pay 6.2% up to that amount, meaning the business withholds the employee’s share and contributes a matching amount for a total of 12.4%.
- Medicare tax, which is 1.45% of all wages, with no wage base cap. Again, both the employee and employer pay the percentage for a total of 2.9%.
Under FUTA, employers must pay 6% on the first $7,000 of each employee’s annual wages, before any credit. In many cases, if state unemployment taxes are paid fully and on time, the business can receive a credit of up to 5.4%, yielding an effective rate of 0.6%.
Be aware, certain states with outstanding federal unemployment-trust-fund loans may not qualify for the full credit, so employers could face higher effective FUTA rates in those jurisdictions. FUTA taxes are paid only by the employer, so you shouldn’t withhold them from employees’ wages.
Additional Medicare Tax
This payroll tax often flies under the radar. Under a provision of the Affordable Care Act, an additional Medicare tax of 0.9% applies to employee wages above:
- $200,000 for single filers.
- $250,000 for married couples filing jointly.
- $125,000 for married couples filing separately.
Only employees pay this tax. However, employers are responsible for withholding it once an employee’s wages exceed $200,000, even if the employee ultimately may not owe it (for example, for joint filers).
State Unemployment Insurance
Every state also runs its own unemployment insurance program to provide benefits to eligible workers who are involuntarily terminated. State unemployment obligations vary widely in terms of wage base, rate and employer versus employee contributions.
Generally, the rate employers must pay is based on their experience rating. The more claims made by former employees, the higher the tax rate. States update these rates annually.
How We Can Help
Managing payroll taxes can be complex, especially as rates and rules are updated from year to year. With the right system, procedures, employee training and professional guidance in place, you can confidently meet your compliance requirements. If handling payroll taxes has become a burden on your business, you should consider working with a payroll provider that calculates and deposits your local, state and federal payroll tax on time. Contact us today to learn how we support our clients with all aspects of payroll taxes.
