What payroll taxes do small businesses need to pay?

Payroll Taxes Small Businesses Must Pay in Alabama

Small businesses operating in Alabama need to manage several payroll tax obligations to stay compliant and avoid penalties. Understanding these taxes helps streamline payroll processes and ensures accurate financial planning.

Federal Payroll Taxes

• Social Security Tax: Employers must withhold 6.2% of each employee’s wages and match this amount.
• Medicare Tax: Employers withhold 1.45% of wages and match the same amount.
• Federal Income Tax Withholding: Employers withhold federal income tax based on IRS withholding tables and employee W-4 forms.
• Federal Unemployment Tax Act (FUTA): Employers pay FUTA tax, generally 6.0% on the first $7,000 of each employee’s wages, subject to credits for state unemployment tax paid.

Alabama State Payroll Taxes

• Alabama State Income Tax Withholding: Employers must withhold state income tax based on employee earnings and withholding allowances. Alabama uses a graduated tax rate system.
• Alabama Unemployment Insurance (SUTA): Employers pay state unemployment tax. Rates vary depending on the employer’s experience rating and are applied to the first $8,000 of each employee’s wages as of 2026.

Operational Considerations

• Registration: Register with the IRS for an Employer Identification Number (EIN) and with the Alabama Department of Revenue for state withholding and unemployment accounts.
• Payroll Systems: Use automated payroll software to calculate, withhold, and remit taxes accurately and timely.
• Reporting: File federal payroll tax returns (e.g., Form 941 quarterly) and Alabama state returns according to deadlines to maintain compliance.
• Recordkeeping: Maintain detailed payroll records including wages, tax withholdings, and tax payments for at least four years.