7: Payroll Tax Rates – Part 3 of Federal Payroll Tax Series

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What are the tax rates for each Federal payroll tax?

This is the third episode of a six-part series on Federal payroll taxes. If you haven’t listened to the first two episodes already, I would recommend that you go back and listen to episode 5, which is the first part in the series.


  • Federal income tax (“FIT”) rates range from 0% to 39.6%.
  • Social security tax is 6.2% up to on wages up to $118,500 (in 2016) and is withheld from your employee’s earnings and matched by you for a total of 12.4%.
  • Medicare tax is 1.45% on wages up to $200,000 and then it jumps to 2.35%, and is withheld from your employee’s earnings and matched by you for a total of 2.9% and 4.7%.
    • Social security and Medicare are referred to together as FICA.
  • Federal unemployment tax (“FUTA”) varies by state. The rate is 6.0% but you get a 5.4% credit when you pay your state unemployment tax by the time the FUTA tax return is due.
    • The effective rate in most states is .6%.
    • In states that have not repaid their Title 12 loans on time, the credit is reduced thereby increasing the FUTA rate for that state. For example, in 2015, the FUTA rate in California was 2.2%
  • Supplemental federal income tax rate is 25% and is used to tax certain earnings types such as a holiday bonus.

Lock in Letter

You might receive a notice from the IRS if an employee has serious under withholding problem. The notice will require you to set the employee’s W-4 status and allowances to their specifications.

The IRS gives you 60 days to make change in your payroll system. Once you receive a Lock in Letter, you cannot change an employee’s status until the IRS tells you it is ok to do so.

Resources (clickable)

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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