Statutory deductions in the United States, explained
Reviewed by Mellow Editorial Team, HR & payroll content team
Statutory deductions are amounts employers are legally required to withhold from employee paychecks and remit to the appropriate government agencies. In the US, these fall into two main categories: federal income tax and FICA payroll taxes — with state income tax added in most states.
Federal income tax withholding
Federal income tax is progressive, with rates running from 10% to 37% depending on an employee's taxable income and filing status. As an employer, you do not calculate the correct bracket yourself. Instead, each employee completes a Form W-4, which tells you their filing status, any adjustments, and whether they want additional withholding. You use the W-4 data alongside IRS withholding tables (Publication 15-T) to determine how much to withhold from each paycheck.
If an employee's circumstances change — a new dependent, a second job, a change in filing status — they should submit an updated W-4. You are required to use the most recent version an employee gives you.
FICA: Social Security and Medicare
FICA stands for the Federal Insurance Contributions Act. It covers two separate taxes, and both the employee and employer pay a share.
Social Security is withheld at 6.2% of the employee's wages, up to the annual wage base. Once an employee's earnings for the year exceed that ceiling, Social Security withholding stops for the remainder of the calendar year. You as the employer also contribute 6.2% on the same wages — this is entirely your cost, not deducted from the employee's pay.
Medicare is withheld at 1.45% with no earnings cap. Again, you match that 1.45%.
There is also an Additional Medicare Tax of 0.9% that applies to high-earning employees. This surcharge is the employee's obligation only — you do not match it. You are required to withhold it once you have paid an employee more than a threshold amount in a calendar year, regardless of whether the employee will ultimately owe it (that is settled when they file their personal return).
In practical terms: for most employees, you are withholding 7.65% of gross wages for FICA (6.2% + 1.45%) and contributing a matching 7.65% yourself on top of that.
State income tax
State tax obligations depend on where your employees work, not just where your business is incorporated. Several states — including Texas, Florida, and Washington — levy no state income tax on wages. Most other states do, each with its own withholding forms, rate tables, and deposit schedules. If you have employees working in multiple states, you will have separate registration, withholding, and filing requirements in each of those states.
Note that state tax is generally based on where the work is performed. For a remote employee, that usually means the state where the employee physically sits and works, which can create nexus obligations you may not have anticipated.
Deposit and reporting requirements
Withholding the money is only part of the obligation — you also have to remit it on time and report it accurately.
Depositing withheld taxes: The IRS assigns employers either a monthly or semi-weekly deposit schedule for federal income tax and FICA, based on your total tax liability in a lookback period. Missed or late deposits attract penalties, so it is worth knowing your schedule before you run your first payroll.
Form 941: You file this quarterly return to report total wages paid, federal income tax withheld, and the employee and employer shares of FICA for the quarter. It reconciles what you withheld against what you deposited.
Form W-2: By January 31 each year, you must provide every employee with a W-2 showing their total wages and all amounts withheld during the prior year. Copies also go to the Social Security Administration by the same deadline.
If you engage independent contractors rather than employees, the reporting obligation is different — you generally issue a 1099-NEC for any contractor paid $600 or more in a year, also by January 31. Contractors handle their own tax payments; you do not withhold from their fees.
What employers commonly get wrong
A few mistakes come up repeatedly. First, misclassifying employees as contractors eliminates your withholding obligation on paper, but if the IRS or a state agency reclassifies that worker, you can face back taxes, interest, and penalties. Second, using a stale W-4 — for example, a pre-2020 version — can produce incorrect withholding amounts and complaints from employees at tax time. Third, treating all remote employees as if they are subject only to the employer's home-state rules ignores the reality that state tax follows the worker's location.
Running payroll across multiple states, or with a mix of employees and contractors, adds meaningful complexity. Understanding the structure of statutory deductions — what is withheld, who matches what, and when it must be reported — is the foundation for getting it right. You can see how these obligations interact across different worker types in how Mellow runs payroll across six countries.
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