Understanding Payroll Taxes for Employers

Payroll taxes are the tax amounts tied to wages that an employer is responsible for withholding, paying, and reporting. They are one of the most important parts of running payroll, and getting them right keeps your team paid correctly and your records clean.

This guide explains employer payroll taxes in plain language, what they include, the difference between what you withhold and what the business pays, and how to track each amount. If you are newer to payroll altogether, it helps to start with our guide on payroll processing basics before you dig into the tax lines.

What Are Employer Payroll Taxes?

Employer payroll taxes are the tax amounts tied to wages that an employer withholds, pays, and reports. Some come out of the employee's wages. Others are paid by the business on top of wages. Each amount has to be calculated, tracked, and sent to the right agency on the right schedule.

The key idea is that payroll taxes have two sides. The employee side is the amounts withheld from gross pay, which reduce net pay. The employer side is the amounts the business pays on top of wages, which do not reduce net pay but are a real cost of employing people. Understanding that split is what makes payroll taxes manageable instead of confusing.

The Two Sides of Payroll Taxes

Payroll taxes fall into two groups. Amounts withheld from the employee reduce the employee's net pay. Amounts paid by the employer are a cost the business pays on top of wages. The table below shows how the two sides compare.

Social Security and Medicare taxes sit on both sides. The employee share is withheld from wages, and the employer pays an equal share on top. That split is why payroll taxes have to be tracked carefully. For a closer look at how those lines fit together on a paycheck, see our guide on how payroll deductions work.

What You Withhold From Employee Wages

The amounts you withhold from employee wages are the employee side of payroll taxes. The employer calculates them, holds them back from the paycheck, and sends them to the right agency. These amounts reduce the employee's gross pay to arrive at net pay.

Common amounts withheld from wages include federal income tax withholding, the employee share of Social Security and Medicare taxes, and state income tax where the state has an income tax. Some locations also require local payroll tax withholding. The amounts depend on the employee's wages, filing status, and withholding details, so they are calculated for each employee on each pay run.

Because these amounts reduce net pay, they are also part of the deduction lines on a paycheck. For a closer look at how gross pay becomes net pay after those lines, see our guide on gross pay vs net pay.

What the Employer Pays on Top

The amounts the employer pays on top of wages are the employer side of payroll taxes. They do not reduce the employee's net pay, but they are a real cost the business pays. Tracking them separately from the withheld amounts keeps your books reflecting the true cost of payroll.

Common employer paid amounts include the employer share of Social Security and Medicare taxes and federal and state unemployment taxes. Unemployment taxes are generally paid by the employer and not withheld from the employee. The rates and wage bases vary by tax type and location, so the employer amounts are calculated for each employee on each pay run alongside the withheld amounts.

Example: An Hourly Employee's Payroll Taxes

Consider an hourly employee who works 40 hours in a week at $22 per hour. Their gross pay for the week is $880. From that gross pay, the employer withholds federal income tax, the employee share of Social Security and Medicare taxes, and state income tax where applicable.

Say the withheld amounts total $170. The employee's net pay is $710. On top of those withholdings, the employer pays the employer share of Social Security and Medicare taxes and federal and state unemployment taxes. Those employer amounts do not change the employee's net pay, but they are a real cost the business pays. The example shows how one paycheck carries both sides of payroll taxes at once.

Example: A Salaried Employee's Payroll Taxes

Take a salaried employee who earns $52,000 per year and is paid biweekly, which is 26 pay periods. Their gross pay for each pay period is $2,000. From that gross pay, the employer withholds federal income tax, the employee share of Social Security and Medicare taxes, and state income tax where applicable.

Say the withheld amounts total $360. The employee's net pay for the pay period is $1,640. On top of those withholdings, the employer pays the employer share of Social Security and Medicare taxes and federal and state unemployment taxes. The example shows that the same two sided logic applies whether the employee is hourly or salaried. Each paycheck carries the employee side and the employer side of payroll taxes.

How to Track Payroll Taxes Each Pay Run

Tracking payroll taxes accurately is what keeps your payroll and your bookkeeping in sync. On every pay run, record each amount by type and by employee, then reconcile your payroll liability accounts alongside your bank and credit card accounts each month. That reconciliation proves the amounts you withheld and the amounts you paid match what was actually sent to each agency.

• Record each withheld amount and each employer paid amount by type and by employee on every pay run.
• Keep the employee side and the employer side tracked separately so your books reflect the true cost of payroll.
• Track what you owe to each agency and what you have paid so you know what is still due.
• Reconcile payroll liability accounts alongside your bank and credit card accounts each month.
• Keep each employee's withholding details on file so the withheld amounts stay correct over time.

Good tracking also makes onboarding smoother. When a new employee's withholding details are collected up front, the payroll taxes start right on the first paycheck instead of needing a catch up adjustment later. For more on collecting those details, see our new hire payroll setup checklist.

Common Payroll Tax Mistakes

• Mixing up the employee and employer sides. The amounts withheld from wages reduce net pay. The amounts the employer pays on top do not. Mixing them up leads to wrong net pay and books that do not reflect the true cost of payroll. Track the two sides separately.
• Forgetting the employer paid payroll taxes. Employer payroll taxes are a real cost the business pays on top of wages. They do not show up on the employee's paycheck, but they belong in your payroll records and your books. Track them so your costs are complete.
• Withholding the wrong amount because details are stale. When an employee updates their withholding form, the withheld amounts have to change too. Stale details mean the wrong net pay and the wrong amounts sent to agencies. Keep withholding details current.
• Not reconciling payroll liability accounts. Without reconciliation, the amounts you owe and the amounts you have paid can drift apart. Reconciling payroll liability accounts each month proves the numbers match and catches errors before they compound.
• Losing track of what is still due. Payroll taxes have to be sent to the right agency on the right schedule. If you do not track what is owed and what has been paid, you can fall behind without noticing. Track your liabilities so you always know what is due.

Getting Started

Employer payroll taxes have two sides. The employee side is the amounts withheld from wages, which reduce net pay. The employer side is the amounts the business pays on top, which are a real cost of employing people. When you understand the split and track each amount by type and by employee, payroll taxes become a steady, predictable part of running payroll instead of a source of confusion.