Payroll tax: How Much Should You Pay? Who’s Responsible?

Let’s be real: very few people launch a company thinking, “Can’t wait to deal with payroll tax.” And yet, the minute you pay someone—including yourself—you’re in it.

What used to be a tucked-away back-office task is now front and center. In 2025, payroll tax isn’t just paperwork—it’s a compliance risk, a cash flow lever, a culture-builder (or destroyer), and a key part of your company’s reputation. If you don’t understand it, you’re flying blind.

This guide won’t bury you in tax code. It’s here to walk you through what payroll tax is, why it matters, how to get it right, and how to avoid the classic, expensive, keep-you-up-at-night mistakes.

What is payroll tax?

In simple terms, payroll tax is the money taken out of employee paychecks—and the money your company chips in—to fund government programs. Things like:

• Social Security
• Medicare
• Unemployment insurance
• State disability (in some places)
• Local taxes (in a few cities)

It’s separate from income tax. It’s based on wages paid, not your tax bracket. And unlike income tax, it’s a shared responsibility: employees pay a piece, and so do you. If you’ve got employees, payroll tax is non-negotiable.

How does payroll tax actually work? 

If any of that is wrong or late, the IRS doesn’t send reminders—they send penalties. So yeah, this is one you want to get right. Every time you run payroll, here’s what’s happening under the hood:

1. Calculate each employee’s gross pay (base pay + overtime + bonuses + taxable perks).
2. Withhold their share of taxes.
3. Add your employer share.
4. Send all those payments off to the IRS and the state.
5. File reports showing what you paid, when, and for whom.

What is the purpose of payroll tax?

At the bottom of the  line: it fully adds up—and it’s your job and duty to fully calculate, withhold, pay, and honestly  report every single bit of it. Here’s the full on honest standard breakdown for majority companies in the U.S.:

Federal

• Social security: 6.2% for the employee, 6.2% from back to you (up to the exact wage cap)
• Medicare: 1.45% of each, plus additional 0.9% extra for employees who earn more than over $200K (you don’t match that)
• FUTA (unemployment): 6% on the first $7,000 of all wages—but you usually get a a solid 5.4% credit, so you only pay just 0.6%

State-level (varies)

• State enforced unemployment insurance (SUTA)
• Top insurance (in states like CA, NJ, NY)
• Some cities, like San Francisco and NYC, have additional local payroll taxes

Who has to pay for payroll tax?

If you’ve got W-2 employees—full-time, part-time, or seasonal—you’re on the hook. You have to:

• Withhold and remit their taxes
• Pay your share as the employer
• File the paperwork that proves you did it

Even if you’re the top founder and paying yourself through a solid S Corp, this fully applies.

Independent contractors (1099 workers)? Different story. They pay self-employment tax. But misclassifying an employee as a contractor to “skip” payroll taxes? That’s how companies end up in lawsuits or audit hell. Don’t go there.

How to calculate payroll tax 

Yes, good payroll software does most of this automatically. But if you don’t understand how it should work, you won’t know when something’s gone wrong. Here’s the basic flow:

1. Start with gross wages.
2. Apply federal and state income tax withholding (based on their W-4).
3. Deduct Social Security (6.2%) and Medicare (1.45%) from the employee.
4. Match those percentages on the employer side.
5. Add in unemployment taxes (FUTA, SUTA).
6. Include taxable perks, bonuses, and commissions where required.

Why is payroll tax important?

The better your system, the fewer late nights, angry emails, and finance “fire drills” you’ll have to deal with. Sure, it’s compliance. But it’s also:

• Financial planning tool (affects labor costs, budget, and cash flow)
• Trust issue (employees want to see correct withholdings, every time)
• Legal risk (one wrong classification can lead to IRS fines or lawsuits)
• Scaling issue (the more people and states you hire in, the more complex this gets)

What HR does to keep this whole thing from falling apart?

Behind every smooth payroll run is an HR (or People Ops) team keeping things tight:

• Making sure job titles and classifications are up to date
• Handling onboarding docs (like W-4s and state equivalents)
• Flagging tax implications when people move to new states
• Working with payroll and finance to clean up any weirdness

If HR isn’t looped in—or is stuck using outdated systems—it’s only a matter of time before things break.

Which are the most common payroll tax mistakes?

Avoid all of this with regular audits, synced systems, and actual communication between HR, finance, and legal.

1. Misclassifying workers: If they walk, talk, and act like employees… they’re probably employees. Mislabeling them as contractors to “save money” is a fast track to legal trouble.
2. Using the wrong tax rate: Especially common when companies grow fast or hire across states. Don’t assume what worked last year still applies.
3. Missing deadlines: Whether it’s remitting taxes or filing quarterly reports—late means fines.
4. Forgetting about fringe benefits: Some perks are taxable. Bonuses? Definitely taxable. Don’t overlook them.
5. Poor internal handoffs: If HR changes someone’s status but payroll doesn’t get the memo? Mistakes happen.

How to be ready for payroll tax audits?

Good payroll software helps, but you still need to understand what’s happening under the hood. Don’t wait for an IRS letter to get your act together. If you get audited—and you might—being organized is your superpower.

Keep:

• Pay records
• Timecards
• W-4s and equivalent forms
• Form 941s and 940s
• Classification records

No one starts a company because they’re passionate about payroll tax. But ignoring it—or treating it like an afterthought—is a great way to derail everything you’ve built.

Here’s the good news: When your payroll tax systems are clean, your team runs smoother. You plan better. You sleep better. You make decisions based on facts, not “uhh… I think we paid that?”

So take the time. Set it up right. Make it part of your culture of clarity and trust.

Because when your team knows they’re getting paid right—and your business knows it’s staying compliant—everything else becomes a whole lot easier.