10.2 Payroll, Employment Taxes & Worker Classification
Key Takeaways
- The employer share of FICA is 7.65 percent - 6.2 percent Social Security up to the 2026 wage base of $184,500 plus 1.45 percent Medicare on all wages with no cap.
- The additional 0.9 percent Medicare tax on wages above $200,000 is withheld from the employee only; the employer does not match it.
- FUTA is 6.0 percent on the first $7,000 of each employee's wages, reduced by a credit of up to 5.4 percent for timely state unemployment payments, giving most Alabama employers a net 0.6 percent, or $42 per employee per year.
- Alabama's state unemployment taxable wage base is $8,000 for 2026, and Alabama income tax is withheld using employee Form A-4 and remitted on Form A-1 or A-6.
- Form 941 is filed quarterly, Form 940 annually, and Forms W-2 and W-3 are due to employees and the Social Security Administration by January 31.
10.2 Payroll, Employment Taxes & Worker Classification
[!NOTE] Payroll and Employment Taxes is its own scored subject area on the Alabama HAC blueprint. Expect straightforward computation and due-date questions: who pays which tax, what percentage, on what wage base, and which form reports it.
Step 1: The New-Hire Paperwork Chain
| Document | Purpose | Deadline |
|---|---|---|
| Form W-4 | Employee federal withholding election | Before the first payroll |
| Alabama Form A-4 | State withholding exemption certificate | Before the first payroll |
| Form I-9 | Federal employment eligibility verification | Section 1 by day one; Section 2 within three business days |
| E-Verify case | Alabama Section 31-13-15 requirement for every employer | Normally within three business days of the start date |
| State new-hire report | Child-support and benefit-integrity reporting | Within seven days of hire |
I-9 records are retained for three years after the hire date or one year after termination, whichever is later.
Step 2: The Taxes Themselves
FICA - Social Security and Medicare
| Component | Employee rate | Employer rate | 2026 wage base |
|---|---|---|---|
| Social Security (OASDI) | 6.2% | 6.2% | $184,500 |
| Medicare (HI) | 1.45% | 1.45% | No limit |
| Additional Medicare | 0.9% on wages over $200,000 | No employer match | No limit |
The combined employer share on ordinary wages is therefore 7.65 percent, and the employer withholds a matching 7.65 percent from the employee. Once an employee passes the Social Security wage base within a calendar year, the 6.2 percent stops for both parties but the 1.45 percent Medicare continues on every dollar.
FUTA - Federal Unemployment
- Rate: 6.0 percent on the first $7,000 of each employee's annual wages.
- Credit: up to 5.4 percent for timely payment of state unemployment contributions.
- Effective rate for a compliant Alabama employer: 0.6 percent, a maximum of $42 per employee per year.
- FUTA is an employer-only tax. Nothing is withheld from the employee.
- If a state carries an unrepaid federal unemployment loan past the federal deadline, the credit is reduced and employers in that state pay more.
Alabama Unemployment (SUTA)
- Taxable wage base for 2026: $8,000 per employee.
- The contribution rate is experience-rated - new employers pay a standard rate, and the rate then rises or falls with the employer's benefit-charge history. Every layoff that generates benefit charges raises the rate for years.
- SUTA is an employer-only tax in Alabama; nothing is withheld from the employee.
Alabama Income Tax Withholding
- Withheld using the employee's Form A-4 election and the Alabama Department of Revenue withholding tables.
- Remitted monthly or quarterly on Form A-1 (quarterly) or Form A-6 (monthly), with an annual reconciliation on Form A-3 accompanied by state copies of the W-2s.
Step 3: Deposits and Returns
| Obligation | Form | Frequency / due date |
|---|---|---|
| Federal income tax withheld plus both FICA shares | Deposited by EFTPS | Monthly or semiweekly, determined by the lookback period |
| Quarterly federal payroll return | Form 941 | Last day of the month after each quarter ends |
| Annual federal unemployment return | Form 940 | January 31 |
| Employee wage statements | Form W-2 to employees, W-3 transmittal to SSA | January 31 |
| Nonemployee compensation | Form 1099-NEC | January 31 |
A monthly depositor remits by the 15th of the following month. A semiweekly depositor remits on Wednesday for Wednesday-through-Friday paydays and on Friday for Saturday-through-Tuesday paydays. Deposit status is set by the total tax reported during a four-quarter lookback period, not by company size.
[!WARNING] The trust fund recovery penalty. Withheld income tax and the employee share of FICA are trust funds held for the government. A responsible person who willfully fails to remit them can be held personally liable for 100 percent of the unpaid trust fund amount, and that liability pierces the corporation or LLC. Payroll taxes are never a source of short-term working capital.
Step 4: What Labor Really Costs
A $25.00 per hour installer working 2,080 hours costs far more than $52,000:
| Cost component | Annual amount |
|---|---|
| Base wages (2,080 hours at $25.00) | $52,000 |
| Employer FICA at 7.65% | $3,978 |
| FUTA at 0.6% of the first $7,000 | $42 |
| Alabama SUTA (example 2.7% of the $8,000 base) | $216 |
| Workers compensation (example 6% of payroll) | $3,120 |
| General liability allocated to payroll | $1,040 |
| Health insurance, paid time off, training, uniforms | $8,300 |
| Total annual cost | $68,696 |
That is a 32 percent burden, and the effective cost per billable hour is higher still, because drive time, shop time, training, and paid leave are paid but not sold. A contractor billing against the $25.00 base wage is losing money on every hour.
Step 5: Employee or Independent Contractor
The Internal Revenue Service applies a common-law test grouped into three categories:
- Behavioral control - does the business direct when, where, and how the work is performed, and does it train the worker?
- Financial control - who invests in tools and vehicles, who can realize a profit or a loss, is the worker paid a flat fee for a result or by the hour, and does the worker market services to the public?
- Type of relationship - is there a written contract, are employee-type benefits provided, is the arrangement indefinite, and is the work a core service of the business?
No single factor controls. A helper who rides the company truck, uses company tools, follows the company schedule, and works only for that company is an employee, whatever the paperwork says.
Consequences of getting it wrong: back federal income tax withholding, both halves of FICA, FUTA and SUTA with interest and penalties, back overtime under the FLSA, exposure to a workers compensation claim with no policy behind it, and - uniquely in Alabama - a potential unlicensed-contracting problem under Title 34, Chapter 31, since the misclassified worker was performing certified contractor functions without certification.
For 2026, what does an Alabama employer owe in federal unemployment tax for an employee who earns $46,000 during the year, assuming the employer pays its state unemployment contributions on time?
A superintendent earns $200,000 in 2026. Which statement about the employer share of FICA on those wages is correct?
An HVAC company pays a helper by the hour, supplies the truck and all tools, sets the daily schedule, and issues a Form 1099-NEC instead of a Form W-2. Under the Internal Revenue Service common-law test, how is this worker properly classified?