What Payroll Actually Costs You
I recently got a great question from a client. They had just run payroll, looked at their bank account, and asked me: "Why am I paying this much in taxes?"
I love this question because the answer is genuinely good news, and because almost every business owner wonders it at some point.
Here's what they were seeing. When you run payroll, two separate amounts usually come out of your checking account. The labels depend on your software, but you'll often see something like "payroll" or "wages" for one, and "payroll tax" for the other. That second one tends to be bigger than people expect, and it's alarming.
The good news: you are not paying that entire amount in taxes. Most of it was never your money to begin with. Let me show you what I mean.
Your employee never sees their whole paycheck
Let's say your employee earns $4,000 for work they did for your business.
You agreed to pay them $4,000. But they will never see $4,000 land in their bank account, and that's not because of anything you did. The government requires that a portion of every paycheck be held back and sent in on the employee's behalf.
Some of that is fixed. Social Security and Medicare come out of every paycheck, no exceptions. The rest (federal income tax, Ohio income tax, city tax) depends on the forms your employee filled out when you hired them. Someone who is married with three kids will have less withheld than someone who is single with none.
If your payroll is set up correctly, your software calculates all of this for you. In this example, it works out like this:
Gross wages $4,000
Total taxes withheld ($886)
Net pay to your employee $3,114
That $886 is your employee's money. It came out of their wages. You are simply holding it for a moment and passing it along on their behalf.
Think of yourself as a middleman here, not a payer.
So where does the confusing number come from
Here's the part that trips everyone up.
Your actual employer tax cost in this example is $438. But the withdrawal labeled "payroll tax" is $1,324. That's why it looks so bad.
The two withdrawals from your account break down like this:
The $886 inside that tax withdrawal started life as gross wages you were already paying. It's not an extra cost. It's just labeled differently than you expected.
Your true cost to employ this person was $4,438. The $4,000 you agreed to pay, plus $438 in employer taxes.
The part that genuinely is extra
Now, I don't want to leave you with the impression that payroll taxes cost you nothing. There is a real employer cost. It's just much smaller than your bank account makes it look.
Employers in every state pay:
Social Security match, 6.2%. Your employee pays 6.2% and you match it dollar for dollar.
Medicare match, 1.45%. Same idea.
Federal unemployment (FUTA). The rate you'll see quoted is 6% of the first $7,000 of wages, but nearly every employer qualifies for a credit that brings it down to 0.6%. If you pay your state unemployment on time, you get the credit.
Then it depends on your state. In Ohio, you also pay:
State unemployment (SUTA). If you're a brand new employer, you'll start at 2.85% for 2026 on the first $9,000 of each employee's wages. Construction employers start higher, at 5.85%.
Running our $4,000 example through all of that:
Employer tax amount =
Social Security match $248
Medicare match $58
Federal & state unemployment (many variables) $132
Your added cost $438
How to budget for this without doing all that math
You may be reading this thinking that there are too many variables to ever plan around. Fair.
Here's my rule of thumb: estimate 8 to 12% of gross wages for payroll taxes. Use 12% if you want to be conservative and would rather be pleasantly surprised.
The reason it's a range and not a single number is the unemployment piece. Both federal and state unemployment only apply to the first chunk of wages each employee earns during the year. Once an employee crosses $7,000 in gross year-to-date wages, federal unemployment stops for them. Once they cross $9,000, Ohio's stops.
For a full-time employee, that usually happens sometime in the first quarter. Which means your payroll tax cost is heaviest in Q1 and then drops noticeably for the rest of the year. If nobody has explained that to you, January's payroll compared to September's can look like an error.
One important note: the 2.85% rate is only where new employers start. After you've been in business a few years, Ohio assigns you your own rate based on your unemployment claims history. It can go up or down. Check the rate notice you receive each year rather than assuming last year's number still applies.
The costs that don't show up in the payroll withdrawal at all
I'll speak to Ohio here since that's where my experience is, but this is the section I'd most want a new employer to read.
Some payroll costs don't come out automatically when you run payroll. Ohio workers' compensation is the big one. If you have employees in Ohio, you generally must carry coverage, and it goes through the state Bureau of Workers' Compensation rather than a private insurance company. Your payroll provider usually has nothing to do with these payments or filings. That's on you.
Rates vary enormously by industry, because they're based on the risk of the work. An office job is inexpensive. A roofing crew is not.
This list isn't complete, and that's really the point. Depending on your industry and where exactly you operate, there may be other requirements sitting outside your payroll software. It's worth confirming that you aren't missing any.
Why this all gets confusing
Beyond the labels on your bank statement, there's a bookkeeping layer to this that most owners never see.
All of these pieces have to be recorded correctly on your books. Gross wages, employee withholdings, employer taxes, and the timing of when money actually leaves your account are four different things, and they don't always happen on the same day. When they get lumped together or recorded as one number, your financial statements stop telling you the truth about what labor actually costs you. That matters when you're setting prices or deciding whether you can afford to hire.
This is the part where having an accountant in your corner earns its keep. Not because the math is hard, but because knowing what the numbers mean is what lets you make decisions with them.
If you want to see this for yourself, pull your payroll register after your next run. Every payroll service produces one. Set it next to your bank statement and match up the amounts. Once you've done that a couple of times, the withdrawals stop looking mysterious.
The bottom line
Knowing your true labor cost changes how you price your work and how confidently you hire.
It is completely normal to look at one number leaving your bank account and feel uneasy about it. In this case, it just wasn't the number you needed to be looking at.
I hope this gives you a starting point for understanding how payroll works and what it genuinely costs beyond the wages themselves. If you're staring at your own payroll register right now and it still isn't adding up, or if you're not sure whether you're missing a filing requirement, that's exactly the kind of thing I help Ohio business owners sort out. Reach out anytime and I'm happy to walk through it with you.
- Natalie