Running payroll in the United States is not one system, it is three. The federal government takes income tax and payroll taxes. Your state takes its own income tax (in most states), its own unemployment insurance and sometimes disability or family leave contributions. Some cities add a local tax on top. Each has its own forms, rates and deadlines, and each can fine you for getting it wrong.
This guide explains how US payroll works from the employer's side: what you withhold, what you pay on top, which forms you file and when, and where small companies most often slip. It is written for owners and HR managers hiring their first US employees, whether you are based in the US or paying a team there from another country.
The three layers of US payroll tax
1. Federal income tax withholding
You withhold income tax from each paycheck and send it to the IRS on the employee's behalf. How much depends on the employee's Form W-4: filing status, whether they have other jobs, dependents, other income, deductions and any extra amount they ask you to withhold. You apply the IRS withholding method to the wages for that pay period. The employee is responsible for the final tax bill; your job is to withhold correctly from what they told you.
2. FICA: Social Security and Medicare
FICA is split between employee and employer.
- Social Security: 6.2% from the employee and 6.2% from you, on wages up to an annual wage base that the government sets each year
- Medicare: 1.45% from the employee and 1.45% from you, on all wages
- Additional Medicare: an extra 0.9% withheld from the employee, which you start withholding once their wages for the year pass $200,000. There is no employer match for this one
Because the employer half is a cost to you and not a deduction from the employee, it does not appear in the employee's net pay. It does appear in your total cost of employment, which is why payroll cost is always higher than the salary figure.
3. State and local taxes
This is where US payroll becomes complicated.
- Most states tax income, and a few do not. Some use a single flat rate, others use progressive brackets with their own withholding forms
- Every state runs unemployment insurance (SUTA). New employers are given a starting rate, which then moves with your claims history, and each state sets its own wage base
- Some states add disability or paid family leave contributions, and some cities or counties add a local income or occupation tax
- The state that matters is where the employee works, which is not always where your company is registered
What you pay on top: FUTA and SUTA
Federal unemployment tax (FUTA) is paid by the employer only. The headline rate is 6.0% on the first $7,000 of each employee's wages, but employers who pay their state unemployment tax on time receive a credit of up to 5.4%, so the usual effective rate is 0.6%. State unemployment tax (SUTA) is the larger and more variable cost, because the rate depends on your state and your history.
A quick view of who pays what
| Item | Withheld from employee | Paid by employer |
|---|---|---|
| Federal income tax | Yes | No |
| Social Security | Yes | Yes, matching |
| Medicare | Yes | Yes, matching |
| Additional Medicare | Yes, above threshold | No |
| FUTA | No | Yes |
| State income tax | Yes, where the state has one | No |
| SUTA | Rarely | Yes |
Forms and deadlines you cannot miss
- Form W-4 (employee) and Form I-9 (identity and work authorization): collected when someone joins, kept on file
- Payroll tax deposits: federal taxes are deposited on a monthly or semiweekly schedule. New employers start as monthly depositors, and the schedule for each year follows the taxes you reported in a lookback period (over $50,000 means semiweekly). Once your liability reaches $100,000 on any day, it must be deposited by the next business day
- Form 941: filed quarterly, due on the last day of the month after the quarter ends (April 30, July 31, October 31 and January 31). If you deposited all taxes on time you get 10 extra calendar days. It reconciles wages, withholding and FICA
- Form W-2 to each employee and to the Social Security Administration, due by January 31
- Form 940: the annual FUTA return, due by January 31 (10 extra days if all FUTA tax was deposited when due)
- State withholding and unemployment returns: monthly or quarterly, with dates that differ by state
- Form 1099-NEC for contractors you pay above the reporting threshold
Deadlines and thresholds are updated by the authorities from time to time, so always confirm the current ones on the IRS and your state website before you file.
Pay frequency, overtime and final pay
- Pay frequency: weekly, every two weeks, twice a month and monthly are all used. Many states require a minimum frequency, and some limit how long after the period you can pay
- Overtime: under federal law, non-exempt employees must be paid at least 1.5 times their regular rate for hours over 40 in a week. Some states also require overtime after a set number of hours in a day, which changes the calculation
- Exempt or non-exempt: classification depends on duties and salary level, not on the job title. Getting it wrong is one of the costlier mistakes
- Final pay: the deadline for the last paycheck after someone leaves depends on the state, and so does the treatment of unused vacation
Benefits that change the tax
How a deduction is taxed matters, because it changes what you withhold.
- Traditional 401(k) contributions reduce income tax withholding but are still subject to Social Security and Medicare. A Roth 401(k) does not reduce taxable wages at all
- Health premiums paid through a Section 125 cafeteria plan reduce both income tax and FICA wages
- Employer 401(k) matching is a company cost and is not part of the employee's taxable wages
- Bonuses and commissions are supplemental wages. You can withhold federal tax on them at a flat 22% (37% on the portion of supplemental wages above $1 million in a year) or combine them with regular pay and use the standard method
The most common US payroll mistakes
- Withholding tax for the wrong state because the employee works remotely from another one
- Treating employees as contractors to avoid payroll tax, then being reclassified in an audit
- Missing or late deposits, which carry penalties that grow quickly
- Using the state's new-employer SUTA rate after the first rate notice has arrived
- Forgetting that a pre-tax benefit affects FICA and income tax differently
- Not keeping W-4s and I-9s on file in a way you can produce on request
A simple checklist for every pay run
- Confirm the employee's state, W-4 and pay rate are current
- Review hours, overtime and unpaid leave before calculating
- Check that each deduction (401(k), health, loans) is entered with the right tax treatment
- Review the totals: gross, withholding, employer taxes and net pay, against the previous period
- Approve, then pay, then record the payment date
- Keep the figures for your quarterly and year-end filings in one place
How WibesHR handles US payroll
WibesHR's HR and payroll module has a US payroll pack. It works out federal income tax from each employee's W-4 answers, Social Security, Medicare and Additional Medicare, employer FUTA, state income tax for states with a flat rate (and a percentage you enter for other states), and state unemployment tax from your own rate and wage base. Pre-tax 401(k), Roth 401(k), employer match and Section 125 health deductions are supported, and a bonus marked as supplemental wages is withheld at the flat supplemental rate.
Pay runs move from calculated to approved to paid to closed, with every payslip kept as it was generated. Year-end W-2 and Form 941 totals are built from those payslips, and a NACHA file is available for bank payments.
To be clear about the limits: WibesHR prepares the figures and files, but it does not submit anything to the IRS or a state for you. Progressive state tax brackets and local taxes are not calculated automatically yet, so you enter the withholding percentage for those employees. Plans are priced per employee per month, and you can run a real pay cycle in the 7-day free trial, which includes every feature and needs no payment details.
Hiring in more than one country? Read the UK payroll guide and the Canada payroll guide, and see how HRMS pricing works per employee.
Frequently asked questions
What taxes does an employer withhold from US employees?
Federal income tax, the employee share of Social Security and Medicare, any Additional Medicare tax, state income tax where the state has one, and any local taxes or benefit deductions the employee has agreed to.
What is the employer cost on top of salary in the US?
Employer Social Security and Medicare (7.65% together on most wages), FUTA, state unemployment tax, and any state-specific contributions and benefits the company provides. The total varies by state and by employer history.
When is Form 941 due?
Quarterly, by the last day of the month after each quarter closes: April 30, July 31, October 31 and January 31. If you deposited all your taxes on time you get 10 extra calendar days, and a date that falls on a weekend or holiday moves to the next business day.
Do I need to register in each state where an employee works?
Generally yes. Employing someone in a state usually means registering for state withholding and unemployment insurance there, even if your company is based elsewhere. The rules differ by state, so check each one or ask an accountant.
Is this tax advice?
No. Rates, wage bases and deadlines change every year, and individual situations differ. Use this guide to understand the process and confirm the figures with the IRS, your state and your accountant.
