Payroll Tax vs Income Tax: What Employers Pay
Payroll tax vs income tax explained for employers: what you actually pay, what you only withhold, and why income tax costs your business nothing at all.
Payroll Tax vs Income Tax
The difference that actually matters is not what they are called. It is which one comes out of your account and which one you merely hand along
Every guide to this topic answers the wrong question. They explain that payroll taxes fund social insurance and income taxes fund general spending, and that one is flat while the other is progressive. All true, but I run a small company, and what I would tell another founder first is simpler: only one of these taxes actually costs the business money.
Income tax costs your business nothing. Not a dollar. It is the largest line on your employee's pay stub. You calculate it, withhold it, and remit it, and you are liable if you get it wrong, but it is not your money and it never was. You are a courier.
Payroll tax is different, and the difference is not conceptual. Part of it comes out of your own account. When your employee pays $100 in Social Security, you pay another $100 out of business funds. It never appears on their pay stub, so they do not know it happened.
So the useful axis is not payroll versus income. It is what you pay versus what you merely handle. This guide takes that view. FirstHR is not a payroll processor and does not file your taxes; your provider does that. The Social Security wage base and some other figures here change every year, and this is general information rather than tax advice.
The Short Answer
Payroll tax is partly your own cost, while income tax belongs wholly to the employee and only passes through your hands. One point of vocabulary, because I get asked: there is no single US tax called a salary tax, and whoever uses the phrase means one of these two. If you take one thing from this article, take this table.
| Payroll tax | Income tax | |
|---|---|---|
| Who pays it | Employer and employee, split | Employee only |
| Does it cost you money? | Yes. Directly | No. Not a cent |
| Rate structure | Flat percentage of wages | Progressive, by bracket |
| What it funds | Social Security, Medicare, unemployment | General government spending |
| Depends on personal circumstances? | Barely. It is a percentage of wages | Heavily. W-4, filing status, dependents |
| Is there a cap? | Social Security yes, Medicare no | No cap |
| Your role | Payer and administrator | Administrator only |
| Where it is reported | Form 941 and Form 940 | Form 941, and the employee's own return |
Look at the second row. It is the entire article, and it is the row nobody leads with. That one asymmetry decides what you can afford to pay someone, which makes this a small business question rather than an accounting one.
Pay vs Withhold, the Distinction That Actually Matters
What you pay is your money and a real cost; what you withhold is the employee's money, and you only pass it along. Forget the payroll and income labels for a moment and sort every tax by whose money it is.
The employee's share of Social Security and Medicare sits in the pass-through column, next to income tax: it is a payroll tax, but it is the employee's money and you only forward it. The Additional Medicare Tax sits there too, despite being a Medicare levy, because you withhold it and do not match it.
Some payroll tax is your money. Some payroll tax is not. And none of the income tax ever is.
What Payroll Tax Is
Payroll taxes are levied on wages, at flat rates, to fund specific programs. That is the whole definition and it explains their behavior.
Three properties follow from that definition.
The first is flatness. Social Security is 6.2 percent whether the employee earns $30,000 or $150,000. There are no brackets. The only breaks in that flatness are the wage base, which is a cap rather than a bracket, and the Additional Medicare Tax, which is a surcharge rather than a progression.
The second is that the money is earmarked rather than general revenue. Social Security tax funds Social Security. Medicare tax funds Medicare. FUTA and SUTA fund unemployment insurance. This is why they are sometimes called social insurance contributions rather than taxes, and it is why they exist as separate lines rather than being folded into income tax.
The third is that they are shared, and this is the property that costs you money. Most owners underweight it until they are budgeting a hire, which is why the rest of this article is worth reading rather than skimming.
What Income Tax Is
Income tax is levied on a person's income, progressively, and funds general government spending. And from your point of view as an employer, the important word is "person".
Because it is a tax on the person, it depends on facts about the person that have nothing to do with you: their filing status, their dependents, their spouse's income, their other income, their deductions. You cannot know most of that, which is why the whole system runs off a form the employee fills in themselves.
Withholding is an estimate, not a settlement
The income tax you withhold is a prepayment, calculated from the W-4, of a liability that is only settled when the employee files their return. If you withheld too much, they get a refund; if too little, they owe. It is worth understanding, because employees ask.
Neither outcome means your payroll was wrong. And neither is your problem: your obligation is to withhold the amount the W-4 and the IRS tables produce, not the amount that turns out to be correct at year end. The same logic explains why a bonus appears to be taxed punitively when it is only being withheld at a different rate.
The W-4 is the whole mechanism
Everything about income tax withholding flows from that one form. Get it during onboarding, keep it, act on it, and update it when they give you a new one. It sits alongside the rest of the tax forms for new employees, and it is the single most consequential piece of paper in the stack for this purpose.
One thing you should never do is advise an employee on how to fill it in. You are not their tax adviser, you may be creating liability for yourself, and the IRS publishes its own Tax Withholding Estimator. Point them at it and step back.
Every Employment Tax in One Table
Here is the complete picture: every employment tax, who pays it, where it stops, and which form reports it. The wage base and state rates move from year to year; the structure does not.
| Tax | Employee | Employer | Cap | Form |
|---|---|---|---|---|
| Social Security (OASDI) | 6.2% | 6.2% | Annual wage base | 941 |
| Medicare (HI) | 1.45% | 1.45% | None | 941 |
| Additional Medicare | 0.9% | Nothing | Starts above $200,000 | 941 |
| FUTA | Nothing | 0.6% effective | First $7,000 each | 940 |
| SUTA | Nothing, usually | Varies by state | State wage base | State |
| Federal income tax | Their bracket | Nothing | None | 941 |
| State income tax | Varies | Nothing | None | State |
| Local income tax | Varies | Nothing | None | Local |
Two rows in that table are structurally strange, and both get their own section below. Additional Medicare is a payroll tax with no employer share, which makes it behave like an income tax wearing a payroll tax's clothing. And SUTA is the only employment tax whose rate is specific to you personally rather than set by statute.
FICA in Detail
FICA is where most of the money is, and it is where the employer match lives.
| Social Security (OASDI) | Medicare (HI) | |
|---|---|---|
| Employee rate | 6.2% | 1.45% |
| Employer rate | 6.2% | 1.45% |
| Combined | 12.4% | 2.9% |
| Wage cap | Yes, an annual wage base that rises most years | None. Every dollar |
| What happens at the cap | Both sides stop paying for the rest of the year | Nothing. It continues |
| Reported on | Form 941 | Form 941 |
Those rates come from IRS Topic 751. Your employee pays a combined 7.65 percent in FICA, and you pay the same 7.65 percent out of your own funds, which makes it the single largest employer tax line in this article.
The wage base, and the autumn surprise
Social Security stops at the annual wage base. According to the Social Security Administration, that base is $184,500 for earnings in 2026 and $192,300 for 2027. Once an employee's year-to-date wages cross it, the deduction disappears from their stub and their net pay rises. The base is adjusted each year with average wage growth, so the figure in any article ages fast.
That has two consequences. First, the employee will ask you about it, having concluded that payroll made an error in their favor. Second, and more usefully, your matching contribution stops at the same moment, so your cost for that employee drops for the rest of the year and resets in January.
If you employ several people near the wage base, your tax expense becomes genuinely lumpy across the year. That is worth modeling rather than discovering.
Medicare, by contrast, never stops. It is 1.45 percent on the first dollar and the millionth. Both lines are visible on the employee's pay stub, which is where they will notice the change and where they will come to you about it.
The Additional Medicare Tax, and Why It Breaks the Categories
The Additional Medicare Tax is the one that shows the payroll-versus-income distinction is not as clean as everyone pretends.
It is levied under the Medicare rules, appears on Form 941 with the other payroll taxes, and everyone calls it a payroll tax. But the employee pays all of it, an income threshold triggers it, and it depends on the employee's overall tax situation: the liability threshold on their return runs from $125,000 for married filing separately to $250,000 for a joint return.
That is an income tax in every respect except its name and its filing location.
The wrinkle that catches employers
You withhold on the wages you paid above $200,000, without regard to filing status. The employee's actual liability, though, turns on their filing status and household income, which may include a spouse's wages from a different employer.
So an employee may end up owing more than you withheld, or less. Both happen, and both are resolved on their tax return. Withholding on the wages you paid once they crossed $200,000 is the beginning and end of your responsibility here.
FUTA and SUTA, the Taxes You Pay Alone
The unemployment taxes are the ones you pay alone. In almost every state nothing is withheld from the employee for them, and the whole bill comes out of your account.
FUTA
Per IRS Topic 759, the FUTA rate is 6.0 percent on the first $7,000 of each employee's wages. But employers who pay their state unemployment taxes in full and on time receive a credit of up to 5.4 percent, dropping the effective rate to 0.6 percent.
| Figure | Meaning | |
|---|---|---|
| Statutory rate | 6.0% | What you would pay with no state credit |
| Maximum credit | 5.4% | Earned by paying SUTA in full and on time |
| Effective rate | 0.6% | What almost every employer actually pays |
| Wage base | First $7,000 per employee | It stops after that. It does not scale with salary |
| Annual cost per employee | About $42 | 0.6% of $7,000. Which is why nobody remembers it exists |
| Filed on | Form 940, annually | Deposited quarterly if liability exceeds $500 |
Forty-two dollars a year. It is genuinely small, and the reason to know about it anyway is the exception.
SUTA
State unemployment tax is the strange one, because your rate is personal to you. Two businesses on the same street, paying the same wages, can owe materially different amounts, and the difference is not a quirk of the statute but a record of their own conduct as employers.
States assign an experience rating based on your history of unemployment claims. Lay people off, and former employees claim benefits, and your rate goes up. Do not, and it goes down. New employers start at a standard rate until they have a history.
The lesson worth internalizing is that letting people go costs more than it looks, because the extra expense is spread invisibly across your SUTA rate for years afterward. It is not a large amount, but it is real, and it is the only tax in this entire article that responds to how you actually run the business.
SUTA is also the one place where employees sometimes contribute, and the list is short. The Department of Labor's comparison of state unemployment insurance laws names three states that require workers to pay unemployment taxes: Alaska, New Jersey, and Pennsylvania. Everywhere else, state unemployment tax is entirely the employer's, and nothing is withheld from the paycheck for it.
What a Hire Really Costs You in Tax
In tax alone, a hire costs you roughly 8 to 11 percent on top of their salary. Here is where that number comes from, line by line, so you can put it in a budget.
That is before any benefit, before workers compensation, before equipment. If you are budgeting a hire at their salary figure, you are budgeting wrong by about a tenth.
And notice what is missing: no income tax appears in that table at all. The largest deduction on your employee's pay stub, the one they complain about and the one that takes the biggest bite out of their gross, is invisible to your cost structure. It passes through you and touches nothing.
That line, as a sheet. The first tab prices one hire before you send the offer. The second carries the same four rows across everybody on the payroll, which is the number to look at before you decide you can afford the next person.
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Line | Rate or basis | Amount you pay | Notes |
| 2 | Salary or expected wages | The figure in the offer | Not a tax. Every line below is a percentage of it | |
| 3 | Social Security, employer share | 6.2 percent of wages up to the annual wage base | Stops for the year once the employee crosses the base | |
| 4 | Medicare, employer share | 1.45 percent of all wages | No cap, so it never stops | |
| 5 | FUTA | 0.6 percent of the first $7,000 at the usual credit | Higher if your state is a credit reduction state | |
| 6 | SUTA | Your own experience rated figure on the state wage base | Take it from your state rate notice, not from an average | |
| 7 | Total employer tax | The four lines above, added | This is the money that leaves the account | |
| 8 | Loaded cost of the hire | Salary plus total employer tax | Before benefits, workers compensation, equipment or a desk | |
| 9 | ||||
| 10 | Withheld, and not a cost | Income tax, the employee share of Social Security and Medicare, and the Additional Medicare Tax | None of it belongs in the rows above |
The Forms You File
Four forms carry the whole thing, and they split neatly along the lines this article has been drawing. Form 944 is not a fifth: it replaces Form 941 for very small employers, and only when the IRS tells them to.
| Form | What it reports | When | Who it is about |
|---|---|---|---|
| Form 941 | Federal income tax withheld, plus both shares of Social Security and Medicare | Quarterly | All of it. Your money and theirs, on the same form |
| Form 944 | The same thing, for very small employers | Annually | Only if the IRS has told you to file it. Do not just decide to |
| Form 940 | FUTA | Annually, by January 31 | Purely your money. No employee share appears |
| Form W-2 | Annual wages and withholding, per employee | By January 31 | The employee's summary. Also goes to the SSA |
| State forms | State income tax withholding and SUTA | Varies | Different in every state. This is where multi-state gets painful |
Notice that Form 941 mixes the two categories: the income tax you merely withheld sits on the same return as the FICA you actually paid. That is a small piece of evidence for this article's thesis: the payroll and income labels do not follow how the money really splits, but the pay-versus-withhold distinction does.
Form 940, by contrast, is pure employer cost. There is no employee column, because there is no employee contribution. It is due January 31, and the IRS gives you until February 10 if you deposited all your FUTA tax when it was due.
Deposits, Deadlines, and the One That Can Ruin You
Filing is not the same as paying. You deposit the money throughout the year and file a return summarizing it, and the deposits are where the danger is.
Your deposit schedule, monthly or semiweekly, depends on your total tax liability during a lookback period. Deposit deadlines run off your pay dates, not the periods worked.
The dividing line is $50,000. According to IRS Topic 757, you are a monthly depositor if you reported $50,000 or less in the lookback period and a semiweekly depositor above it. Separately, accumulating $100,000 or more in a single deposit period moves you to a next-business-day deposit at once. New employers start monthly.
This is the single most dangerous thing in payroll, and it comes directly from the pay-versus-withhold distinction. The money you withheld was never yours to spend. Spending it is not a cash flow decision. It is a decision to use somebody else's money, and the government takes that view of it too.
If You Pay Yourself
Founders ask this, and the answer depends entirely on how the business is structured: sole proprietorship or partnership, S corporation (S corp), or C corporation (C corp).
| If you are | You pay | Note |
|---|---|---|
| A sole proprietor or partner | Self-employment tax: both halves of FICA, 15.3% up to the wage base | You are both employer and employee. You pay both sides |
| An S corp owner taking a salary | Normal payroll taxes on the salary portion | The salary must be reasonable. This is heavily scrutinized |
| An S corp owner taking a distribution | No FICA on the distribution portion | This is why the reasonable salary requirement exists |
| A C corp employee | Normal payroll taxes, like any employee | You are an employee of your own company |
Per the IRS, the self-employment tax rate is 15.3 percent, which is exactly the combined employee and employer FICA, because that is what it is. You can deduct the employer-equivalent half when computing income tax, which reduces the pain without removing it.
The S corp salary-versus-distribution question is a genuine planning area and a genuine audit risk, and it is beyond the scope of anything you should decide from an article. Take advice.
Contractors Change Everything, Which Is the Problem
If the person is a 1099 contractor rather than a W-2 employee, you withhold nothing and owe no employer tax at all.
| W-2 employee | 1099 contractor | |
|---|---|---|
| Income tax withholding | You calculate, withhold, and remit | None. Not your problem |
| Social Security and Medicare | You match 7.65% | None. They pay both halves themselves |
| FUTA | You pay it | None |
| SUTA | You pay it | None |
| Year-end form | Form W-2 | Form 1099-NEC |
| Your tax cost | Roughly 8 to 11% above wages | Zero |
Read the last row and you will understand why worker classification is enforced as aggressively as it is. Calling someone a contractor rather than an employee saves you around a tenth of what you pay them, plus benefits, plus workers compensation, plus a set of legal obligations.
How It All Looks on a Pay Stub
Everything in this article lands, eventually, on a document your employee reads and misunderstands. Here is the translation.
| Stub line | What it is | Is it your money? |
|---|---|---|
| FED, FIT, or FITW | Federal income tax withheld | No. Theirs |
| OASDI, SS, or SOC SEC | Social Security, employee share | No. Theirs. But you paid the same again, invisibly |
| MED or MEDICARE | Medicare, employee share | No. Theirs. Same again, invisibly |
| FICA | The umbrella term for the two above | No |
| ADD MED | Additional Medicare, above $200,000 | No. And you do not match this one |
| SIT or ST TAX | State income tax | No. Theirs |
| SUI or SDI | State unemployment or disability, where employees contribute | Usually no. But check your state |
| Nothing at all | Your entire employer FICA, FUTA, and SUTA | Yes. All of it. And it is not on the document |
The last row is the point. Your half of the tax is invisible. The pay stub is a statement of the employee's wages, not a statement of your costs, so the 7.65 percent you paid to match them appears nowhere, and neither does the unemployment tax.
So an employee looking at their stub has no way of knowing what you actually spend on them. If you want them to know, you have to tell them separately.
Common Mistakes
The same mistakes come up again and again, and the last one on this list is in a different league from the others.
The unifying error is treating the money in your payroll account as though it is all yours. Some of it is. Most of it is not: the portion you withheld belongs to your employee and to the government, and you are holding it in trust.
The entire structure of penalties around payroll tax exists because that distinction is easy to blur when cash is tight. So keep the two apart: budget for the taxes you pay, and deposit the taxes you withhold on schedule.
Frequently Asked Questions
What is the difference between payroll tax and income tax?
Payroll taxes fund specific social insurance programs, are calculated as a flat percentage of wages, and are shared between employer and employee. Income taxes fund general government spending, are progressive and based on the individual's total tax situation, and are paid entirely by the employee. From an employer's perspective the practical difference is simpler still: you pay part of the payroll tax out of your own money, and you pay none of the income tax. You only withhold and remit it.
Is payroll tax the same as income tax?
No. They are separate taxes that fund different things, use different bases, and fall on different people. The payroll taxes are Social Security, Medicare, and unemployment tax, all charged at flat rates on wages. As the employer, you match the employee's Social Security and Medicare contributions and, in all but three states, carry the whole unemployment tax bill yourself. Income tax is levied progressively on the individual's income; you withhold it from wages and send it on to the government, but not one dollar of it is your cost. People mix the two up because both leave the same paycheck.
How are payroll taxes different from personal income taxes?
Four ways. Payroll taxes are flat-rate; income tax is progressive. Payroll taxes fund earmarked programs, specifically Social Security, Medicare, and unemployment insurance; income tax funds general government spending. Payroll taxes are partly the employer's own liability; income tax is entirely the employee's. And payroll taxes are calculated on gross wages, largely ignoring the employee's personal circumstances, whereas income tax withholding depends on their Form W-4, filing status, and dependents.
Is there such a thing as a salary tax?
Not as a single US tax, no. The phrase is loose shorthand for the pair that leaves a paycheck together: payroll taxes, part of which the employer pays and part of which it withholds, and income tax, which the employer only withholds. Hong Kong does levy a statutory Salaries Tax, but that is a different jurisdiction and has no bearing on what a US employer owes.
Which payroll taxes does the employer actually pay?
Four of them. You pay a 6.2 percent Social Security match on each employee's earnings until they reach the annual wage base, and a 1.45 percent Medicare match on every dollar they earn, because Medicare has no cap. You also pay FUTA, the federal unemployment tax, which usually works out to an effective 0.6 percent on the first $7,000 you pay each person in a year. Finally there is SUTA, the state unemployment tax, which differs from state to state and with your own claims record. Every other line on the stub is the employee's money, which you only withhold and forward.
Does the employer pay any income tax on employee wages?
No, and this is the single most useful thing to understand about the topic. Every dollar of federal, state, and local income tax taken out of a paycheck is the employee's own liability. Your part is purely administrative: work out the right amount using their Form W-4, deduct it from wages, and pay it over to the tax authorities on schedule. It is usually the biggest deduction on the pay stub, and still not one dollar of it is a cost to your business.
What is FICA?
FICA is short for the Federal Insurance Contributions Act, and it is the collective name for two payroll taxes, Social Security and Medicare. Employees have 6.2 percent withheld for Social Security until they hit the annual wage base, and 1.45 percent for Medicare on all of their wages. The employer pays a matching amount on both, so each side carries 7.65 percent and the total is 15.3 percent. FICA is not an extra tax on top of Social Security and Medicare; it simply names the two together, which is why a pay stub showing FICA, OASDI, and Medicare side by side tends to confuse people.
What is the Additional Medicare Tax and do I have to match it?
It is an extra 0.9 percent charged on the part of an employee's wages above $200,000 in a calendar year, and no, there is no employer match. That makes it unusual: it belongs to Medicare and sits with the other payroll taxes on your returns, yet only the employee pays it. You must start withholding it in the pay period when an employee's wages go over $200,000 and keep withholding through December. Base it on the wages you pay and nothing else, ignoring the employee's filing status, even though their final bill on their own return turns on that status.
What is FUTA and how much does it cost?
FUTA is the federal unemployment tax, and the employer carries all of it; nothing comes out of the employee's pay. On paper it is 6.0 percent of the first $7,000 each employee earns in a year. In practice almost nobody pays that, because paying your state unemployment taxes on time earns a credit worth up to 5.4 percent, which leaves an effective rate of 0.6 percent. That comes to about $42 per employee per year, an amount small enough that most owners forget it. The catch is a credit reduction state: when a state leaves a federal loan unpaid, the credit shrinks and your rate climbs. For tax year 2025 that put California employers at an effective 1.8 percent, while the U.S. Virgin Islands carried a 4.5 percentage point reduction.
What is SUTA and why is my rate different from another company's?
SUTA is the state unemployment tax, and unlike nearly every other employment tax, its rate is set for your business in particular. Your state works it out from your own record: the more unemployment claims your former employees have made, the higher it goes, so a business that has laid people off pays more than one that has not. A brand-new employer usually starts on a standard rate until it builds that record. SUTA is also the one payroll tax that some states split with workers, and the list is only three long: Alaska, New Jersey, and Pennsylvania. In every other state, the employer pays all of it.
What forms do I file for payroll and income taxes?
Form 941 is the workhorse: filed quarterly, it reports the federal income tax you withheld along with both the employee and employer shares of Social Security and Medicare. Some very small employers file Form 944 annually instead, but only if the IRS has notified them to do so. Form 940 is filed annually for FUTA. State income tax withholding and SUTA go on state forms, which vary. And Form W-2 goes to every employee and to the Social Security Administration in January.
Do I pay payroll taxes on independent contractors?
No, and that is precisely why the classification matters so much. You do not withhold income tax, you do not pay a Social Security or Medicare match, you owe no FUTA or SUTA, and you issue a Form 1099-NEC rather than a W-2. The contractor handles their own taxes, paying self-employment tax to cover both halves of FICA. That is a saving of roughly eight to eleven percent for you, which is exactly why misclassification is aggressively pursued and why the penalties for getting it wrong are severe.
What is self-employment tax?
Self-employment tax is FICA for people who work for themselves. With no employer to share the bill, they pay both the employee half and the employer half of Social Security and Medicare: 15.3 percent combined on earnings up to the wage base, then 2.9 percent for Medicare on anything above it. Half of that, the part an employer would normally pay, is deductible when they work out their income tax, which takes some of the sting out without removing it. If you are a founder paying yourself, the structure of your business decides whether you owe self-employment tax or go through normal payroll withholding.
Why does my employee's Social Security stop being withheld late in the year?
Because they have hit the annual wage base, the earnings cap the Social Security Administration sets each year: $184,500 for wages paid in 2026, and $192,300 for wages paid in 2027. Social Security tax applies only to wages up to that cap. A well-paid employee passes it at some point in the autumn, and from that paycheck on, the Social Security deduction drops off their stub and their take-home pay goes up. Your own match ends on the same paycheck. Medicare keeps going, because it has no cap. In January the count starts over from zero, and both the deduction and your match come back.
What happens if I do not deposit payroll taxes on time?
You face penalties that grow with the delay, and possibly personal liability. The IRS failure-to-deposit penalty is 2 percent when a deposit is one to five days late, 5 percent at six to fifteen days, and 10 percent after that, rising to 15 percent if the money is still unpaid more than ten days after the first IRS notice. The bigger risk sits in what you withheld. The employee's income tax and their half of FICA are trust fund taxes, money you hold for the government on the employee's behalf. If a person responsible for paying them over willfully does not, that person can be made to pay the full unpaid amount personally, and the IRS regards spending the money on other business bills instead as willful. Running the business through a corporation or an LLC does not protect you.