Payroll tax withholding: what employers must know and do

Executive overview

Employers are legally required to withhold several types of taxes from employee paychecks and to match certain contributions. Errors in withholding create compliance risk and payroll inaccuracies.

Two inputs drive withholding amounts: the employee's earnings and their Form W-4 filing status. FICA taxes — Social Security and Medicare — apply to virtually all employees, with fixed rates employers must match dollar-for-dollar.

Accurate withholding depends on collecting W-4s on day one and applying the correct FICA and income tax rates for every pay period.

Taxes withheld from employee paychecks

• Federal income tax: determined by pay period earnings and tax bracket; filing status on Form W-4 affects the rate
• State income tax: applies in most states; either flat or graduated rate — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no state income tax
• Social Security tax (FICA): 6.2% withheld from employee; employer matches 6.2% — combined rate is 12.4%
• Medicare tax (FICA): 1.45% withheld; employer matches 1.45% — combined rate is 2.9%
• Additional Medicare tax: 0.9% on earnings above $200,000; no employer match
• Social Security tax applies only up to $168,600 in earnings (2024); Medicare tax has no earnings cap

Employer responsibilities

• Collect a signed Form W-4 from every new hire before their first day
• Employees must submit a new W-4 to change their federal withholding
• Withhold federal and state income tax per each employee's W-4
• Withhold employee share of FICA and pay the employer match
• Deposit withheld taxes via EFTPS (Electronic Federal Tax Payment System) — a free IRS service
• Determine deposit schedule (monthly or semi-weekly) before the start of each calendar year
• File Form 941 quarterly to report income and FICA taxes withheld and pay the employer FICA portion