In short, payroll taxes are the taxes employers pay the government for the benefit of their employees.
The biggest tax is the Social Security tax. This tax is paid by both the employer and the employee. The employee pays 6.2% of their salary (through payroll withholdings) and the employer matches that amount. Therefore, the government receives 12.4% of the salary to fund the employees’ Social Security benefits when they retire. The tax is assessed on only the first $160K in calendar year salary.
The Medicare tax is 1.45% of the salary and works exactly like the Social Security tax, but there is no cap (does not stop at $160K of salary). So, the government gets 2.9% of the salary to fund the employees’ health insurance when they retire.
The employer also pays state unemployment insurance tax (SUI). This is totally funded by the employer. SUI is paid to the state where the employee works. It funds the unemployment pay that employees receive if they get terminated. The rate is based on the employer’s experience – the more an employer terminates workers, the more they pay in SUI. The rates are updated each year. SUI is assessed on about the first $10K of annual salary (each state has a different wage base) and the rate for most startups is about 3%.
There is also the federal unemployment insurance tax. This federal fund bails out the states when their unemployment fund runs out of money. It is only $56 per year per employee and fully paid by the employer.
The last one is the Paid Family and Medical Leave (PFML) tax. This is a new one and in about 15 states – CA, NY, CO, MA being a few of them. Each state is different – in some states, it is fully paid by the employee (CA and NY for instance) and in other states, both the employee and employer pay this (CO and MA for instance). The employer rate is about 0.5% of payroll in the states that require employer participation. This funds parental leave, medical leave and family caregiving leave.
So, a good back of the envelope estimate for employer taxes is about 10% of payroll paid.
