Payroll tax rates: What are they, and who’s paying?
Payroll taxes affect every US business, with employers and employees responsible for paying the correct contributions. If you’re confused about who pays what and how much, here’s a complete guide to payroll tax rates 2023.
What are payroll tax rates?
Whether you’re a small business or an employee, you must understand payroll taxes and who pays them.
Generally, when people say “payroll taxes,” they’re talking about federal taxes such as Social Security and Medicare, as well as additional state or local taxes. Unlike income tax, which the employee covers, employers and employees pay some payroll taxes, while just the employer pays others. So, the payroll tax rate is the rule used to work out the amount that needs to be paid per employee.
Once you have worked out the payroll tax rate, this can be broken down into how much is covered by the employer and the employee. Payroll taxes cover federal, state, and local taxes used to fund public programs such as Social Security or unemployment programs at both state and national levels.
Let’s look at the different payroll tax rates, how to calculate them, and who must pay payroll taxes.
What are the federal payroll tax rates in 2023?
Federal payroll taxes are also known under another name—FICA—which stands for Federal Insurance Contributions Act. The federal payroll tax rate is usually 15.3 percent and is split evenly between the employer and employee, meaning each party covers 7.65 percent.
As such, if you’re self-employed, you will be responsible for paying the full 15.3 percent.
Federal payroll taxes cover:
Social Security
Medicare
Unemployment tax
Although federal payroll tax rates can change over time, they have been consistent for over 30 years.
The federal payroll tax rates for 2023 are as follows:
Social Security tax rate: 12.4 percent—shared between the employee and employer, covering 6.2 percent each
Medicare tax rate: 2.9 percent—1.45 percent for the employee and 1.45 percent for the employer
Unemployment tax rate: 6 percent covered by the employer on the first $7,000 paid to the employee
Employees can incur additional tax rates, such as the Additional Medicare tax rate of 0.9 percent for the employee, but this only applies if you are earning more than $200,000 per year.
Federal payroll taxes make up the FICA tax, so you may see these marked as FICA or MedFICA on your payslip. Unemployment tax is sometimes called FUTA based on the Federal Unemployment Tax Act—to add another item of tax jargon to your vocabulary.
Some federal payroll taxes have a cap on the amount of your income that can be taxed; keep reading for more on maximum taxable income.
What are state payroll taxes?
In addition to federal payroll taxes, you may also have to pay state payroll taxes. Unlike federal payroll taxes, which are the same for all businesses based in the US, state payroll taxes vary depending on which state (or states) your business and employees are based.
The most common state payroll tax is state unemployment insurance (sometimes called SUI or SUTA) which is covered solely by the employer. To work out the unemployment insurance rates, tax agencies use a wage base to cap the amount of salary subject to this tax. This varies across different states; for example, the 2023 wage base for SUI in California is $7,000, while in Georgia, it is $9,500.
Other factors, such as your industry, can impact the final amount of SUI you must pay. Plus, some states have additional payroll tax requirements for disability insurance, training, and transportation.
Your state tax agency should have guidance on what state payroll taxes you are responsible for, and if you need further advice—why not ask an Unbiased expert for bespoke advice?
What are local taxes?
Local taxes are further payroll taxes based on your business's Zip code, county, or municipality.
Designed to fund local projects that support businesses operating in the area, such as transport, local taxes can be paid by both employers and employees. Local tax agencies should provide the local tax requirements where your business is based.
What is the maximum taxable income in 2023?
For many of these taxes, the maximum taxable income can change year-on-year. State and local taxes vary across the US, so the maximum taxable income will differ depending on where you and your business are based.
These are the maximum taxable incomes by tax:
Maximum Social Security tax for 2023
The Social Security Administration is responsible for setting an annual maximum limit on the amount of salary subject to Social Security tax. For 2023, the maximum taxable income subject to Social Security tax is $160,200.
Maximum Medicare tax for 2023
Unlike Social Security, there is no maximum taxable income for Medicare. In fact, an employee earning more than $200,000 per year will have to pay an additional Medicare tax of 0.9 percent.
For example, an employee earning $190,000 annually would pay around $5,510 in Medicare tax annually. Split evenly with their employer, each party would contribute $2,755 per year, or $459 each per month.
Maximum unemployment tax for 2023
The amount of wages subject to Federal Unemployment Tax (FUTA) and state unemployment tax (SUTA) is known as the wage base, which can change annually.
FUTA is a tax of six percent, which only applies to the first $7,000 an employee earns, so the maximum FUTA for 2023 is $420. The maximum rate of SUTA will vary between different states.
So now you know what payroll taxes are and which ones fall under the responsibility of the employer, employee, or sometimes both. Keeping up to date with the latest tax rates and what they mean for you is essential for business owners, self-employed professionals, and employees.
If you have more questions about payroll taxes or another query about your personal or business finances, contact Unbiased to connect to an expert advisor today.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.