Taxes are one of the main components of running payroll. There are three main categories of taxes that a business running payroll must be aware of: federal, state, and local taxes. Different tax jurisdictions will require different taxes to be withheld from employees and employers.
FICA (Federal Insurance Contributions Act) - FICA tax is comprised of Social Security and Medicare taxes. Both the employee and employer, separately, are subject to these taxes. Refer to the IRS website for current social security and medicare withholding rates.
Federal Income Tax (FIT) - Federal income tax is an employee tax. The amount withheld is calculated based on the withholding certificate (Form W-4) that employees complete during onboarding.
State Income Tax (SIT) - State income tax is an employee tax similar to FIT. The amount calculated to be withheld is based on the state withholding certificate that an employee completes during onboarding. Some states do not have state income tax.
FUTA (Federal Unemployment Tax Act) - FUTA is an employer tax. FUTA tax rates are set by the IRS and employers receive a credit on FUTA for any state unemployment taxes paid. This credit percentage is also set by the IRS.
State Unemployment Insurance (SUI) - State unemployment insurance tax is an employer tax similar to FUTA. The SUTA tax rate is assigned when the business starts running payroll and rates can change annually. Employers will typically receive their new tax rate around the beginning of a new tax year.
Other state and local taxes - States may have additional employment taxes other than SIT and SUI. There are localities in some states that have local taxes that are withheld.
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