Considerations

• Federal payroll taxes are those that the federal government regulates. This includes federal income tax, Medicare tax and Social Security tax, which the employee pays via tax withholding. The employer also pays Medicare and Social Security taxes plus federal unemployment tax. The employer submits federal income tax, Social Security tax and Medicare tax withholding payments, plus his portion of Social Security tax and Medicare tax payments, together, to the IRS. He pays federal unemployment separately to the IRS. An employer can obtain federal employment tax rates from IRS Circular E, the Employer's Tax Guide.
  
  

Federal Income Tax

• An employee's federal income tax withholding is based on her income after subtracting withholding allowances, as shown on line 5 of her W-4 form. The Circular E has the amount that the IRS gives for each withholding allowance based on an employee's pay period -- see page 35 of the 2011 Circular E. To determine federal income tax withholding, the employer uses the percentage method table that matches the employee's pay period, filing status and wages after allowances -- see pages 36 and 37 of the 2011 Circular E. In most cases, an employee is taxed at a flat amount plus a percentage of wages exceeding a certain amount. Depending on the excess wages, the employer calculates federal income tax at 10, 15, 25, 28, 33 or 35 percent.
  
  

FICA Taxes

• The Federal Insurance Contributions Act mandates the collection of Social Security and Medicare taxes. At the time of publication, an employee pays 4.2 percent of taxable wages up to $106,800 for the year in Social Security tax, and 1.45 percent of all taxable wages in Medicare tax. Taxable wages is the employee's pay after subtracting qualifying pretax deductions, such as a Section 125 health plan. At the time of publication, an employer pays 6.2 percent of taxable wages up to $106,800 for the year in Social Security tax, and 1.45 percent of all taxable wages in Medicare tax.
  
  

Federal Unemployment Tax

• The Federal Unemployment Tax Act authorizes the collection of federal unemployment tax. At the time of publication, an employer pays 6 percent of the first $7,000 paid to each employee. Most employers are required to pay state unemployment tax according to their state unemployment agency's regulations. If an employer pays his state unemployment tax as required, he can take the maximum credit of 5.4 percent against his federal unemployment tax, which reduces his federal unemployment tax rate to 0.6 percent, at the time of publication.