Payroll Taxes Explained: FICA, FUTA, and State Unemployment

Employer payroll taxes are the taxes a business pays on top of an employee's wages: the employer half of Social Security (6.2%) and Medicare (1.45%), federal unemployment tax (FUTA), and state unemployment tax (SUI) (IRS Pub 15). Separately, you withhold the employee's own share of Social Security and Medicare, plus income tax, from their paycheck and send it in for them. For 2026, the employer side costs 7.65% of wages up to the Social Security wage base, plus unemployment taxes that stop once each employee passes the federal and state wage bases, often early in the year.

Which payroll taxes come out of the paycheck, and which does the employer pay?

Income tax is withheld from the employee, unemployment taxes are mostly paid by the employer, and Social Security and Medicare are split evenly.

Sources: Pub 15, sections 9 and 14; Pub 15-T; New Jersey Department of Labor.

Withheld taxes are the employee's money, held in trust until you deposit them. The people responsible for depositing them can be held personally liable if they don't; see what happens if you don't pay payroll taxes (Pub 15, section 11). Forming an LLC doesn't shield you from that; see what an LLC does and doesn't protect. Employer taxes are a cost of the business, on top of the wage you agreed to.

How much are Social Security and Medicare taxes in 2026?

Together these are called FICA: 7.65% from the employee and 7.65% from the employer, for 15.3% total (Pub 15).

• Social Security is 6.2% each. For 2026 it applies only to the first $184,500 of an employee's wages; once their pay for the year reaches that, both halves stop until January. The most either side pays per employee is $184,500 × 6.2% = $11,439 (Pub 15).
• Medicare is 1.45% each, with no wage limit (Pub 15).

What is the Additional Medicare Tax, and do employers pay it?

The Additional Medicare Tax is an extra 0.9% withheld from an employee's wages above $200,000 in a calendar year, and employers do not pay a matching share (Pub 15).

You start withholding it in the pay period when the employee's wages for the year pass $200,000 and keep withholding through December. The $200,000 trigger applies to every employee regardless of filing status, even though a married couple filing jointly owes it only on combined wages above $250,000. The employee settles any difference on Form 8959 (IRS Additional Medicare Tax Q&A). An employee paid $250,000 in 2026 has $450 withheld ($50,000 × 0.9%), and your share is $0.

How does FUTA work?

FUTA is a federal unemployment tax of 6.0% on the first $7,000 of each employee's wages per year, paid only by the employer and never withheld from a paycheck (Pub 15, section 14).

You get a credit of up to 5.4% for state unemployment tax you pay, which brings the net rate to 0.6%, or $42 per employee per year. The full credit requires paying your state unemployment tax in full and on time, in a state that isn't a credit reduction state (Pub 15). You report FUTA once a year on Form 940 and deposit it once your undeposited liability passes $500.

Do I owe FUTA?

You owe FUTA for 2026 if either of these is true (Pub 15, section 14):

1. You paid wages of $1,500 or more in any calendar quarter in 2025 or 2026.
2. You had at least one employee for some part of a day in 20 or more different weeks in 2025 or 2026.

Household employers have a different test: $1,000 or more in cash wages to household employees in any calendar quarter. The nanny tax guide covers household rules.

What is a credit reduction state?

A credit reduction state borrowed from the federal government to pay unemployment benefits and hasn't repaid the loan on schedule, so its employers lose part of the 5.4% FUTA credit. The cut starts at 0.3% and grows each year the loan stays outstanding (DOL FUTA credit reductions).

For 2025, the final reductions were California 1.2% and the U.S. Virgin Islands 4.5% (Schedule A (Form 940) for 2025). A California employer paid 0.6% + 1.2% = 1.8%, or $126 per employee instead of $42, with the extra due with the fourth-quarter deposit (Pub 15).

The 2026 rates are projections. The Department of Labor's potential-2026 list, updated September 11, 2026, projects California at 1.5% (up to 5.3% if the estimated 3.8% "BCR add-on" is not waived, as it was for 2025) and the U.S. Virgin Islands at 4.8% (DOL FUTA credit reductions). A state that repays its federal loan before November 10, 2026 owes no reduction at all. DOL certifies the final list after that date, and it applies to the 2026 Form 940 you file in early 2027, so look up your state's certified rate on that DOL page before you file.

What is state unemployment tax (SUI or SUTA)?

SUI and SUTA are two names for the unemployment insurance tax each state charges employers, with its own rate and taxable wage base. New employers get a standard starting rate; after a few years, your rate rises or falls with how many former employees claim unemployment against your account.

Sources: California EDD, Texas Workforce Commission, New York DOL and NYS-45 reporting, New Jersey DOL.

New York's wage base jumped from $12,800 in 2025 to $17,600 in 2026 and now adjusts every year with the state's average wage (NY DOL). New Jersey withholds 0.3825% for UI plus 0.0425% for workforce funds from employees, so employees do pay unemployment tax in some states (NJ DOL).

You need a state unemployment account in each state where your employees work before your first payroll there; see registering for state payroll taxes.

What other state and local payroll taxes might apply?

Depending on where the employee works, you may also withhold state income tax, local income tax, and disability or paid-leave premiums.

State income tax. Most states tax wages and have their own withholding tables and forms. Texas has no personal income tax (Texas Comptroller), and Washington does not currently have an individual income tax (Washington DOR), but employers in both still pay state unemployment tax. Find your state's tax agency through the IRS state government websites directory.

Local income tax. Some cities and counties tax wages too. Pennsylvania employers with worksites in the state must withhold and remit the local Earned Income Tax and Local Services Tax (PA DCED).

Disability and paid family leave. A handful of states fund these through payroll. For 2026:

• California SDI: 1.3% withheld from employees on all wages, with no cap; the employer pays nothing (CA EDD).
• New York Paid Family Leave: 0.432% withheld from employees, up to $411.91 for the year (NY PFL).
• Washington Paid Family and Medical Leave: 1.13% of wages up to the Social Security wage base. Employees pay 71.43% and employers 28.57%, but employers with fewer than 50 employees don't owe the employer share (WA ESD; WA Cares).
• Washington WA Cares: 0.58% withheld from employees on all wages (WA Cares).
• New Jersey disability and family leave: employees pay 0.19% and 0.23% on the first $171,100, and new employers pay 0.5% on the first $44,800 (NJ DOL).

How is federal income tax withholding figured?

Federal income tax withholding comes from the employee's Form W-4 and the IRS tables in Publication 15-T, and there's no employer share (Pub 15-T).

For a 2020-or-later W-4, the percentage method annualizes the paycheck, adjusts it for the W-4 entries, looks up the annual tax in the table for the employee's filing status, and divides it back down to one pay period. If the Step 2 box isn't checked, you first subtract $8,600 (single, head of household, or married filing separately) or $12,900 (married filing jointly) (Pub 15-T 2026, Worksheet 1A). The example below walks through it.

Worked example: a $4,000 monthly paycheck in Texas

Take one employee paid $4,000 a month ($48,000 for 2026) in Texas, which has no state income tax. They're single, filled out a 2020-or-later W-4 with nothing in Steps 2 through 4, and have no pre-tax deductions. The employer is newly registered with the Texas Workforce Commission, so its SUI rate is the 2026 new-employer rate of 2.7% on the first $9,000.

Federal income tax withholding (Pub 15-T 2026, Worksheet 1A, single standard table):

• Annual wages: $4,000 × 12 = $48,000
• Subtract $8,600: $39,400
• The table row for $19,900 to $57,900 is $1,240 plus 12% of the amount over $19,900
• $1,240 + 12% × $19,500 = $3,580 for the year
• $3,580 ÷ 12 = $298.33 per month

The monthly wage-bracket table in Pub 15-T gives $299 for this paycheck, and Pub 15-T also allows rounding to the nearest dollar if you do it consistently. Either method is acceptable (Pub 15-T).

The employee's paycheck, every month:

What the employer pays on top of the $4,000:

FUTA runs out partway through month 2 ($3,000 left under the $7,000 base) and Texas SUI partway through month 3 ($1,000 left under $9,000). From April on, the employer pays FICA only.

• Employer taxes average 8.24% of wages for the year ($3,957 ÷ $48,000): 10.95% in January, 7.65% from April on. Budget for heavier payroll tax in the first quarter and for each new hire.
• This employee adds $910.33 a month to your Form 941 deposits: $298.33 withheld income tax plus $612 in Social Security and Medicare (both halves). FUTA is deposited separately, and Texas SUI goes to the Texas Workforce Commission. Paying from a separate business bank account makes those deposits easy to match to your quarterly Form 941.
• Payroll tax is only part of what an employee costs. Workers' comp, benefits, and paid time off come on top; see the true cost of an employee.

When are payroll taxes due?

Withheld income tax and both halves of Social Security and Medicare are deposited monthly or semiweekly and reported quarterly on Form 941; FUTA is reported annually on Form 940 (Pub 15). Every 2026 date is in payroll tax deadlines for 2026. Each state sets its own deposit dates.

What to do next

1. Register with your state for unemployment tax, and income tax withholding if your state has it, before your first payroll. See registering for state payroll taxes.
2. Look up your state's 2026 SUI rate and wage base through the DOL state agency directory. Your rate notice from the state is the authority for your account.
3. Collect a Form W-4 from every employee and use Publication 15-T or payroll software to figure withholding each paycheck.
4. Put the deposit dates on your calendar from payroll tax deadlines for 2026, and activate EFTPS with the PIN the IRS mails you (you're pre-enrolled if you reported a federal tax obligation when you got your EIN; otherwise, enroll).
5. Decide whether to do the math by hand or use software. CheckMate calculates federal withholding (Pub 15-T percentage method), Social Security and Medicare, FUTA, and state withholding and unemployment tax on every run, and charges only when you run payroll. It doesn't file or remit taxes; it emails reminders before pay dates and Form 941 deadlines saying what to pay and where.

FAQ

Are tips and overtime still subject to payroll tax? Yes. The new federal deductions for qualified tips (up to $25,000) and overtime (up to $12,500, or $25,000 for joint filers) for 2025 through 2028 reduce the employee's income tax on their own return. Tips of $20 or more a month and overtime pay are still generally subject to Social Security and Medicare (Pub 15, What's New).

Do I pay payroll taxes on my own salary as an S corp owner? Yes. An S corp owner who works in the business is an employee, and their salary is wages subject to FICA and withholding like anyone else's (Pub 15). How much to pay yourself is its own question; see S corp reasonable salary.

Do payroll taxes apply to a nanny or housekeeper? For 2026, Social Security and Medicare apply once you pay a household worker $3,000 or more in cash wages (Pub 15). The nanny tax guide walks through the rest.

Sources

1. IRS, Publication 15 (2026), Employer's Tax Guide
2. IRS, Publication 15-T (2026), Federal Income Tax Withholding Methods (PDF)
3. IRS, Questions and Answers for the Additional Medicare Tax
4. IRS, Instructions for Form 940
5. IRS, Schedule A (Form 940) for 2025, Multi-State Employer and Credit Reduction Information
6. IRS, State Government Websites
7. U.S. Department of Labor, FUTA Credit Reductions
8. U.S. Department of Labor, Contacts for State UI Tax Information and Assistance
9. U.S. Treasury, Electronic Federal Tax Payment System (EFTPS)
10. California EDD, Rates and Withholding
11. Texas Workforce Commission, Tax Rates
12. Texas Comptroller, Starting a New Business (Fiscal Notes)
13. New York State DOL, Unemployment Insurance Rate Information
14. New York State DOL, NYS-45 Quarterly Reporting
15. New York State, Paid Family Leave 2026
16. New Jersey DOL, Contribution Rates and Wage Base
17. Washington DOR, Income Tax
18. Washington ESD, Paid Family and Medical Leave Premium Rate for 2026
19. WA Cares Fund, Employers
20. Pennsylvania DCED, Local Income Tax: Instructions for Employers