Haley’s Payroll Tax Basics: Employer Payroll Taxes Explained

The quick answer

What payroll taxes do employers pay?

Employers generally pay their share of Social Security and Medicare taxes. They also pay federal and state unemployment taxes.

Employers must also withhold certain taxes from employee wages and send them to the proper agencies.

All taxes Employee Both Employer

Payroll taxWhat it coversWho pays it?

Federal income taxFederal income tax withholdingEmployee

State and local income taxesState, county or city income taxesEmployee, where applicable

Social SecuritySocial Security benefitsBoth

MedicareMedicare coverageBoth

FUTAFederal unemployment systemEmployer

SUTAState unemployment insuranceEmployer

The most common source of confusion is local payroll taxes. Rules can change based on where an employee lives and works.

01

What Is Payroll Withholding Tax?

Payroll withholding is money deducted from an employee's wages and sent to a tax agency.

This includes federal income tax, applicable state and local income taxes and the employee's share of FICA.

The amount withheld depends on the tax, employee information and applicable rules.

Withholding isn't an extra employer tax.

The business collects the money from employee wages and remits it. Employers must calculate, deposit and report withholding correctly, even though employees fund these taxes.

Too much withheld

The employee may receive a refund.

Too little withheld

The employee may owe money when filing.

02

How Much Does an Employer Pay in Payroll Taxes?

There isn't one employer payroll tax rate that applies to every business.

Most employers pay 7.65% in FICA taxes on wages below the Social Security wage limit. Federal and state unemployment taxes add to that cost.

The final amount depends on employee wages, unemployment rates and taxable wage limits.

03

What Are FICA Taxes?

FICA stands for the Federal Insurance Contributions Act. It funds Social Security and Medicare.

Employers and employees generally pay matching amounts.

Social Security

6.2%

Employer and employee, each

Medicare

1.45%

Employer and employee, each

Combined FICA

7.65%

Employer and employee, each

For 2026, Social Security taxes apply to the first $184,500 in covered wages. Medicare has no annual wage limit.

Employers must also withhold an additional 0.9% Medicare tax above $200,000 in annual wages. There is no employer match for that additional tax.

Example

Employer Payroll Taxes on a $1,000 Paycheck

Try other amounts:

$1,000 $2,500 $5,000 $10,000

Taxable wages$1,000.00

Employer Social Security tax (6.2%)$62.00

Employer Medicare tax (1.45%)$14.50

Total employer FICA$76.50

The employer also withholds the employee's FICA share. Federal and state unemployment taxes may add further costs. This example excludes those taxes and other employer expenses.

04

What Are FUTA and SUTA Taxes?

Unemployment insurance provides temporary financial support to eligible workers who lose their jobs.

Employers generally fund two unemployment tax programs.

Federal

Federal Unemployment Tax (FUTA)

FUTA helps fund the federal-state unemployment system.

6.0%minus up to 5.4% credit= 0.6%

The standard FUTA rate is 6.0% on the first $7,000 of wages per employee. Eligible employers may receive a credit of up to 5.4%, reducing the effective rate to 0.6%.

The credit can vary, including when a state is subject to a credit reduction.

State

State Unemployment Tax (SUTA)

SUTA funds unemployment insurance at the state level.

Each state sets its own rules, wage base and employer tax rates. Rates may depend on the employer's unemployment claims history and other factors.

A new business may receive an assigned starting rate. That rate can change over time.

What Is a Taxable Wage Base?

A taxable wage base is the maximum amount of wages subject to a particular tax during a year.

For example, FUTA generally applies only to the first $7,000 of each employee's annual wages.

State unemployment wage bases vary. Employers must check the rules for each state where they have covered employees.

05

Local Payroll Taxes: Why Kentucky and Indiana Are Different

Federal payroll taxes follow national rules. Local taxes can be more complicated.

This is especially true for businesses with employees in Kentucky and Indiana.

Both states have local income taxes, but their withholding rules work differently.

Kentucky Indiana

Where they live

Where the work happens

Kentucky Payroll Taxes: Where Employees Work Matters

Kentucky has state income tax withholding and local occupational taxes.

For 2026, Kentucky's state income tax withholding rate is 3.5%.

Local occupational taxes may also apply based on where an employee performs work. Different cities and counties have different requirements.

For example, Louisville/Jefferson County requires applicable occupational tax withholding on wages earned within its jurisdiction.

A business with employees at several Kentucky locations may need multiple local tax setups.

The correct tax depends on the jurisdiction, the work performed and any applicable exemptions.

Kentucky vs. Indiana: A Quick Comparison

Employee situation	Kentucky	Indiana
Lives and works locally	Applicable local work-location taxes may apply	January 1 county of residence generally controls
Lives in one county, works in another	Work jurisdiction is important	January 1 county of residence generally controls
Lives out of state, works in state	Work-location taxes may apply	January 1 principal Indiana work county generally controls

These are general rules. Exceptions, reciprocal agreements and special employment situations may change the result.

Haley's payroll tax insight

Correct Setup Comes First

One of the most important parts of payroll implementation happens before the first paycheck.

Employers need accurate employee addresses, work locations and tax account information.

A payroll system can calculate taxes correctly based on its settings. But incorrect settings can produce the wrong withholding.

For Kentucky businesses, that may mean missing a local occupational tax. In Indiana, it may mean assigning the wrong county.

This is why payroll tax setup deserves careful review, especially for businesses operating across state lines.

06

What Are an Employer's Payroll Tax Responsibilities?

Employers are responsible for more than calculating payroll deductions.

They must maintain accurate employee records, register for required tax accounts and apply the correct withholding rules.

A typical payroll tax process includes:

1. 1RegisterObtain the federal, state and local tax accounts your business needs.
2. 2CollectGather required employee information and withholding forms.
3. 3ConfigureAssign the correct taxes based on each employee's circumstances.
4. 4ProcessCalculate and withhold taxes during payroll.
5. 5Deposit and reportSend payments and file required returns on time.
6. 6ReviewUpdate records when employee details or tax rules change.

Accurate payroll processing begins with accurate information.

07

How PayFWDs Helps Businesses Manage Payroll Taxes

Payroll tax administration can become difficult when employees work across different locations.

PayFWDs helps businesses manage the process through hands-on implementation and ongoing payroll services.

Identify and configure

Our team helps identify applicable tax jurisdictions, review employee setups and configure payroll withholding.

Collect, file and remit

We also support payroll tax collection, filing and remittance as part of our services.

One dedicated contact

Clients work with a dedicated contact who understands their payroll and can bring in tax specialists when needed.

Learn more about our customer support model

Frequently Asked Questions

Do employers pay payroll taxes?

Yes. Employers generally pay their share of Social Security and Medicare taxes, plus federal and state unemployment taxes. They also withhold and remit applicable employee taxes.

What is the employer payroll tax rate?

The standard employer FICA rate is 7.65% on wages below the Social Security limit. FUTA and state unemployment taxes add to the employer's cost.

What is the difference between payroll taxes and withholding?

Employer payroll taxes are paid by the business. Withholding taxes are deducted from employee wages and sent to tax agencies.

Are payroll taxes different in Kentucky and Indiana?

Federal FICA rules are generally the same. State withholding, unemployment insurance and local income tax requirements differ.

How are Indiana county tax rates determined?

For most Indiana residents, the county of residence on January 1 determines the county income tax rate. Special rules apply to certain nonresidents.

Do Kentucky employers have to withhold local taxes?

Employers may need to withhold occupational taxes for work performed in certain Kentucky cities and counties. Requirements depend on the jurisdiction.

Can a payroll company handle employer payroll taxes?

Yes. A full-service payroll provider can help calculate withholding, administer payroll taxes and prepare required filings. Employers should still review their responsibilities under the service agreement.

About Haley Paige Meek

Account Onboarding Specialist, PayFWDs

Haley taught herself bookkeeping and built and sold her own bookkeeping business before moving into payroll and tax administration.

Today, she configures payroll databases and trains administrators at PayFWDs. Her work includes reviewing employee tax setups and helping businesses prepare for their first payroll.

Meet the PayFWDs Team

Payroll Made Simple. Support Made Personal.

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