Last updated: October 2026

Payroll Tax vs Income Tax: What Employers Actually Owe

Income tax you withhold is your employee's own tax; payroll tax is partly yours. Income tax comes out of your employee's paycheck. Your share of Social Security and Medicare tax, together called FICA, comes out of your bank account. The IRS groups all of these as employment taxes: federal income tax withheld, Social Security and Medicare taxes, and federal unemployment tax.

When Unpaid Payroll Taxes Become Personal

Withholding is only part of the job. You also owe the employer share of Social Security and Medicare tax, which is not withheld from the employee's pay. A late deposit draws a penalty of 2% when it is 1 to 5 days late and 5% when 6 to 15 days late. It is 10% when more than 15 days late, and 15% when the deposit is still unpaid more than 10 days after the first IRS notice.

The trust fund recovery penalty can make unpaid withholding personal. Trust fund taxes are the federal income tax and the employee share of Social Security and Medicare tax that you withhold from pay. If they are not withheld, or not deposited or paid, the penalty is 100% of the unpaid trust fund tax. If the IRS cannot collect the unpaid taxes from the business right away, it can charge the penalty to each responsible person who willfully failed to collect or pay them. That person can be an officer or employee of a corporation, a partner or employee of a partnership, or an accountant, among others.

How Federal Payroll Tax and Income Tax Withholding Actually Split

The federal income tax you withhold depends on three things: the employee's pay, the payroll period and the employee's Form W-4. That money is part of the employee's wages, which you pay to the U.S. Treasury instead of to the employee. Federal income tax is pay as you go, and the amount withheld is paid to the IRS in the employee's name. The employee claims it, as shown on Form W-2, when filing their own tax return. Your job is to withhold the correct amount and deposit it on time.

Social Security and Medicare taxes work differently. For 2026, Social Security tax is 6.2% and Medicare tax is 1.45%, and the employer and the employee each pay both rates.

Social Security tax caps at $184,500 in wages for 2026. Medicare has no cap. Employees earning over $200,000 ($250,000 for married filing jointly, $125,000 for married filing separately) pay an additional 0.9% Medicare surtax, but employers do not match that extra portion.

FUTA, the federal unemployment tax, is paid only by the employer; it is not withheld from the employee's wages. For 2026 the rate is 6.0% on the first $7,000 of each employee's wages. A credit for state unemployment tax paid in full and on time reduces it to 0.6%. With the full credit, FUTA is $42 per employee per year. Employers in a state with an unpaid federal unemployment advance on January 1 of two or more years in a row can lose part of that credit.

Employer Payroll Tax on One $50,000 Employee

For one employee paid $50,000 in 2026, the employer share of Social Security and Medicare tax is $3,825. FUTA with the full credit adds $42. State unemployment tax depends on the state: new Texas employers pay a 2026 rate of 2.7% on the first $9,000 of wages, which adds $243. In Texas, that brings the employer's total to $4,110.

None of that $4,110 comes from the employee's paycheck.

States That Add Their Own Payroll Taxes

Federal obligations are only the starting point. Oregon’s statewide transit tax is paid by employees: employers withhold one-tenth of 1 percent from employees’ wages. Oregon also charges a Workers’ Benefit Fund assessment of 1.8 cents per hour worked for 2026. Employers withhold 0.9 cents per hour from employees’ wages and pay 0.9 cents themselves. Washington charges WA Cares Fund premiums and Paid Family and Medical Leave premiums on employees' wages. Employers there buy workers' compensation coverage from the state Department of Labor & Industries unless they are certified to self-insure.

None of these appear on a federal Form 941.

Employers with workers in more than one state can read the multi-state payroll guide.

Some payroll plans cover one state only. Gusto lists its Simple plan, for single-state payroll, at $49 per month plus $6 per person. Its Plus plan, which includes multi-state payroll, lists at $80 per month plus $12 per person. Both prices are as published in September 2026.

Five Payroll Tax Errors to Avoid

One error is treating income tax withholding and the employer share of FICA as one amount. Both are reported on the same Form 941, but the employer share of FICA is a separate liability.

Another is missing a change in deposit schedule. Your schedule for each calendar year depends on the taxes you reported in a lookback period that runs from July 1 to June 30. If you reported $50,000 or less, you deposit monthly; if you reported more than $50,000, you deposit semiweekly. A new employer deposits monthly in its first calendar year.

Another is missing the Additional Medicare Tax, the 0.9% surtax above. Employers must withhold it from wages above $200,000 paid to an employee in a calendar year.

Another is using the full FUTA credit in a state where it was reduced. California employers lost part of the credit for each year from 2022 through 2025. For 2025 the reduction was 1.2%, which raised FUTA from $42 to $126 per employee.

The last is treating an employee as a contractor. If you do not withhold because you treated an employee as a nonemployee, you are generally liable for the Social Security, Medicare and income tax you should have withheld. Special section 3509 rates may apply. With the required Forms 1099 filed, they are the full employer share of Social Security and Medicare tax plus 20% of the employee share. For income tax, the rate is 1.5% of wages. Information returns filed late or not at all also draw a penalty for each return. For returns due in 2026, it is $60 up to 30 days late and $130 from 31 days late through August 1. After August 1 or if never filed, it is $340. A worker is generally your employee if you have the right to control what will be done and how it will be done, as IRS Publication 15 explains.

Three Steps to Check Your Tax Deposits

Pull your most recent Form 941. Line 5a reports taxable Social Security wages, and the tax on it is figured at 12.4%, the employee and employer shares together. Check that your deposits included both shares, not only the amount withheld from pay.

Confirm your deposit schedule. Monthly depositors deposit by the 15th of the following month. Semiweekly depositors deposit by the following Wednesday or Friday, depending on the day wages are paid. IRS Publication 15 contains the complete schedule and rules for determining which category applies. Check it at the start of each year.

Review state obligations as a separate task. Federal deposits do not cover state unemployment, disability insurance, or paid leave programs.

If you run payroll yourself, or use a system that does not handle multi-state filings, a full-service provider can file and pay your payroll taxes. OnPay lists Payroll Essentials at $49 per month plus $6 per worker, covering federal, state and local taxes and payroll in multiple states, as published in September 2026. Compare options on the payroll provider comparison page, review current rates on the payroll tax guide, or browse more payroll guides on the PayrollDetective blog.

This is not legal or financial advice. Consult a qualified professional for your specific situation.