Background

Payroll taxes fund programs at different levels of government and have evolved separately. Federal payroll taxes (established under FICA) finance Social Security and Medicare; Congress and the IRS set rates, withholding rules, deposit schedules, and reporting requirements (see IRS Publication 15) [https://www.irs.gov/publications/p15]. States create payroll tax rules to fund state income tax systems, unemployment insurance (SUI), and local payroll levies—so businesses face layered obligations when operating across state lines.

How it works — core differences

  • Which taxes are required: Federal payroll taxes always include Social Security and Medicare withholding and employer matching; additional federal obligations include federal income tax withholding and federal unemployment tax (FUTA). State payroll taxes may include state income tax withholding, state unemployment insurance, and sometimes local or municipal payroll taxes.
  • Who pays and who withholds: Social Security and Medicare are split between employees and employers (each pays 6.2% and 1.45% respectively) while an additional 0.9% Medicare surtax applies to high‑earners and is withheld only from employees (not matched by employers) (IRS) [https://www.irs.gov/businesses/small-businesses-self-employed/social-security-and-medicare-tax]. State taxes vary — some states have no state income tax (e.g., Florida, Texas) while others have progressive brackets (e.g., California).
  • Rate structure and caps: Federal payroll taxes use set percentages and a Social Security wage base limit (reviewed annually by the IRS). State rates and wage bases for SUI differ by state and employer experience ratings.
  • Deposits, filing schedules, and penalties: The IRS controls federal deposit schedules and penalties; states set their own deposit thresholds, reporting forms, and penalty structures. Missing state withholdings or late SUI payments can trigger state assessments independent of federal penalties.

Real-world examples

  • Multi‑state expansion: In my practice advising small employers, I’ve seen companies that hire employees out of state unexpectedly trigger state withholding obligations and SUI registration in those states—requiring retroactive filings and interest on unpaid taxes.
  • Industry differences: Some industries (like construction or hospitality) face local payroll levies or worker‑classification issues that alter withholding responsibilities.

Who is affected / eligibility

  • All employers with paid employees are subject to federal payroll rules. State requirements depend on where the employee works or resides and the employer’s presence in the state. Remote and hybrid work arrangements often create multi‑state obligations that require careful tracking of employee work locations.

Practical compliance tips (professional strategies)

  1. Register promptly in each state where you have employees. State registration is often triggered by hiring an employee who works—or teleworks—within that state.
  2. Use payroll software that automatically applies federal and state withholding rules and updates rate changes; reconcile reports monthly.
  3. Monitor employee work locations and classifications (W‑2 employee vs. contractor) — misclassification is a leading cause of state audits.
  4. Keep separate cash flows for trust fund taxes (employee withholdings) so payroll tax deposits are not commingled with operating funds. In my experience, this control prevents trust‑fund related penalties and personal liability for owners.

Common mistakes to avoid

  • Assuming one state’s rules apply everywhere: employers operating in multiple states must follow each state’s rules.
  • Failing to withhold local taxes: city, county, or transit levies can apply in addition to state obligations.
  • Neglecting deposit schedules: federal and state deposit frequencies differ and are strictly enforced.

Quick reference table (typical items)

  • Social Security: employee 6.2% / employer 6.2% (wage base applies) — see IRS.
  • Medicare: employee 1.45% / employer 1.45% (plus 0.9% Additional Medicare withheld from employees above income thresholds).
  • FUTA (federal unemployment): employer pays; creditable against state SUI when timely paid.
  • State income tax: varies by state — some states have no income tax; others use graduated brackets (California top rates historically near 13.3%).
  • State unemployment insurance (SUI/SUTA): employer tax with state‑set rates and experience adjustments.

Resources and next steps

Related FinHelp.io articles

Frequently asked questions

Q: What if I hired an employee in another state by mistake?
A: You may need to register for withholding and SUI in that state and file retroactive returns. Contact the state tax agency quickly and consult a payroll professional to limit penalties.

Q: Who pays additional Medicare tax?
A: The 0.9% Additional Medicare tax is withheld only from employees once wages exceed IRS thresholds; employers must withhold but do not match it.

Professional disclaimer

This article is educational and does not replace personalized tax, legal, or accounting advice. For specific situations—especially multi‑state payroll complexities—consult a licensed CPA, tax attorney, or state tax agency.

Author note

As an editor and advisor who has worked with payroll teams and small businesses for over a decade, I recommend proactive registration, strong internal controls, and monthly reconciliations to reduce exposure to penalties and audits.