• By law, an employer is required to withhold federal and state payroll taxes from his employees' paychecks. Employers are also required to pay their own payroll taxes. To prevent fines, it is critical that payroll taxes are paid correctly and timely.

    Federal Tax

    The employee is required to complete a W-4 form upon being hired. His federal tax amount is based on his W-4 withholdings, his income and on the IRS withholding tax tables (Circular E).

    State Tax

    State income tax rate varies by state and on the employees' withholdings. Some states (e.g. South Dakota and Florida) do not charge income tax.

    Medicare Tax

    FICA (Federal Insurance Contribution Act) requires employees and employers to pay Medicare taxes. The employee is required to pay 1.45 percent of his annual wages; the employer must match this amount.

    Social Security Tax

    FICA also requires the employee to pay Social Security taxes--6.2 percent of his wages up to the annual limit ($106,800 for 2009). The employer must pay a matching amount.

    Unemployment Taxes

    The employer is required to pay federal unemployment taxes (FUTA) and state unemployment taxes (SUTA). For FUTA, he must pay 6.2 percent on the first $7,000 earned by each employee annually. SUTA rates vary from state to state.


    Payroll Taxes

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