Payroll Taxes (FICA, FUTA, SUTA)
Quick Definition
Taxes that employers must withhold and pay on employee wages — including Social Security, Medicare, federal unemployment, and state unemployment taxes.
What Is Payroll Taxes (FICA, FUTA, SUTA)?
Payroll taxes are the taxes associated with having employees. They're split between what you withhold from employees' paychecks and what you pay as the employer on top of wages. Understanding the components is essential because mishandling payroll taxes is one of the fastest ways to get in serious trouble with the IRS.
FICA (Federal Insurance Contributions Act) covers Social Security and Medicare. The combined rate is 15.3% of wages — split 50/50 between employer and employee. The employee's share (7.65%) is withheld from their paycheck. The employer's share (7.65%) is an additional cost on top of wages. Social Security tax (6.2% each) applies up to a wage base of $168,600 in 2025. Medicare tax (1.45% each) applies to all wages with no cap. Employees earning over $200,000 owe an additional 0.9% Medicare surtax.
FUTA (Federal Unemployment Tax Act) is a federal unemployment tax paid by the employer only — employees don't contribute. The rate is 6.0% on the first $7,000 of each employee's wages, but employers who pay state unemployment taxes on time get a 5.4% credit, making the effective rate just 0.6% — or $42 per employee per year. SUTA (State Unemployment Tax Act) is the state counterpart. Rates vary dramatically by state and by your business's claims history. A new business might pay 2-3%, while a business with many unemployment claims could pay 5-7% or higher.
Why It Matters for Small Businesses
Payroll taxes are not optional, and the penalties for getting them wrong are severe. The IRS considers unpaid payroll taxes one of the most serious tax violations — they can assess a "Trust Fund Recovery Penalty" that makes individual owners personally liable for unpaid employee withholdings, even if the business is an LLC or corporation. Your personal liability protection evaporates. Payroll tax deposits are due on a semi-weekly or monthly schedule depending on your total tax liability, and Form 941 (quarterly) and Form 940 (annual) are required filings. Most small businesses use payroll software or services to handle the complexity — the cost of a mistake is far higher than the cost of the software.
Example
Sarah hires her first employee at $50,000/year. Here's her payroll tax breakdown: Employee's FICA withholding: $3,825 (7.65% × $50,000). Employer's FICA: $3,825 (matching 7.65%). FUTA: $42 (0.6% × $7,000). SUTA (assume 2.7% rate, first $10,000): $270. Total employer payroll tax cost: $4,137 per year — about 8.3% on top of the $50,000 salary. So the true cost of that $50,000 employee is $54,137 before you factor in benefits, workers' comp insurance, and overhead. Sarah needs to deposit these taxes semi-weekly or monthly and file Form 941 every quarter.
Key Takeaways
- ✅ FICA (15.3% total) is split 50/50 between employer and employee — you match what they pay
- ✅ FUTA effectively costs just $42 per employee per year if you pay state unemployment taxes on time
- ✅ SUTA rates vary by state and your claims history — more employee claims = higher rates
- ✅ Use payroll software — the penalty for mishandling payroll taxes is personal liability for the business owner
How Holdings Helps
Holdings tracks your payroll expenses and tax obligations automatically, helping you budget accurately for the true cost of every employee.
Related Terms
Owner's Draw vs Salary
Two ways business owners pay themselves — a draw takes money directly from business profits, while a salary is a fixed, regular paycheck with taxes withheld.
Workers' Compensation
Insurance that covers medical expenses and lost wages for employees who are injured or become ill on the job — required by law in nearly every state.
LLC vs S-Corp vs C-Corp
Three common business structures that differ in liability protection, tax treatment, and ownership flexibility.
Profit and Loss (P&L)
A financial statement that summarizes your revenue, costs, and expenses over a specific period to show whether your business made or lost money.
Cash Flow Statement
A financial report that shows how cash actually moved in and out of your business over a specific period — the most honest picture of your financial health.
Workers' Compensation
Insurance that covers medical expenses and lost wages for employees who are injured or become ill on the job — required by law in nearly every state.
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