Understanding Income Taxes and Employer Payroll Taxes

Federal and Oklahoma Income Taxes Explained for Individuals, Employees, and Business Owners

Income taxes and payroll taxes are often misunderstood because employees and employers see different parts of the system. Employees see taxes coming out of their paycheck, while employers are responsible for additional taxes, matching contributions, and reporting requirements behind the scenes.

Understanding how both sides work helps individuals understand their tax rate and helps business owners understand the true cost of hiring employees.

This guide explains:

How federal and Oklahoma income taxes work
How tax brackets apply to income
What employers must withhold and match
What forms employees complete when hired
Why employees sometimes still owe taxes even when withholding is done correctly

Part 1. What Is Taxable Income?

Income taxes apply to taxable income, not total income.

Taxable income is calculated after:

Standard or itemized deductions
Retirement contributions
Business expenses
Certain adjustments and credits

Because of this, two people earning the same income can owe very different amounts in tax.

Part 2. Federal Income Tax Explained

The federal government uses a progressive tax system. Different portions of income are taxed at different rates.

For the 2025 tax year, federal income tax rates are:

10 percent
12 percent
22 percent
24 percent
32 percent
35 percent
37 percent

Moving into a higher tax bracket does not mean all income is taxed at that higher rate. Only the income within that bracket is taxed at that percentage.

2025 Federal Tax Brackets (Simplified)

Single Filers

10 percent up to approximately $11,925
12 percent from approximately $11,926 to $48,475
22 percent from approximately $48,476 to $103,350
24 percent from approximately $103,351 to $197,300
32 percent from approximately $197,301 to $250,525
35 percent from approximately $250,526 to $626,350
37 percent above that level

Married Filing Jointly

10 percent up to approximately $23,850
12 percent from approximately $23,851 to $96,950
22 percent from approximately $96,951 to $206,700
24 percent from approximately $206,701 to $394,600
32 percent from approximately $394,601 to $501,050
35 percent from approximately $501,051 to $751,600
37 percent above that level

Your highest bracket is your marginal rate. The average percentage you actually pay is your effective tax rate.

Part 3. Oklahoma State Income Tax Explained

Oklahoma also uses a progressive income tax system.

For most taxpayers, Oklahoma income tax ranges from:

0.25 percent up to 4.75 percent depending on income level.

Once income exceeds the upper threshold, additional income is taxed at the top marginal rate.

Part 4. How Business Owners Pay Income Tax

Most small businesses do not pay income tax separately.

Sole proprietors and single member LLCs report income on the owner’s personal return.
Partnerships and multi member LLCs pass income through to owners.
S corporations pass income through but require payroll for owner wages.
C corporations pay income tax at the corporate level.

For most Oklahoma small businesses, business income is taxed at the owner’s individual federal and state rates.

Part 5. Employer Payroll Taxes Explained

When a business hires employees, there are two sides to payroll taxes:

Taxes withheld from employees
Taxes paid by the employer

Understanding this distinction is critical for employers.

Taxes Withheld From Employees

Employers must withhold:

Federal income tax based on Form W4
Social Security tax
Medicare tax
Oklahoma state income tax based on Form OK W4

These funds are held in trust and remitted to the IRS and Oklahoma Tax Commission.

Employer Matching Taxes

Employers must match certain payroll taxes paid by employees.

Social Security tax totals 12.4 percent.
Employee pays 6.2 percent and employer pays 6.2 percent.

Medicare tax totals 2.9 percent.
Employee pays 1.45 percent and employer pays 1.45 percent.

This means employers contribute an equal amount to what is withheld from employees for these taxes.

Employer Only Payroll Taxes

Some payroll taxes are paid entirely by the employer and are not deducted from employee wages.

Federal Unemployment Tax (FUTA)
Oklahoma State Unemployment Tax (SUTA)

These taxes fund unemployment programs and are a cost of employing workers rather than a deduction from paychecks.

Part 6. Forms Employees Must Complete When Hired

Before receiving wages, employees must complete:

Form W4 for federal withholding
Form I9 for employment eligibility verification
Oklahoma Form OK W4 for state income tax withholding

Employers must keep these forms on file.

Part 7. Employer Filing Responsibilities

Employers must file payroll reports regularly.

Federal filings include:

Form 941 quarterly payroll tax return
Form 940 annual unemployment tax return
Form W2 annual wage report to employees
Form W3 summary sent to the Social Security Administration

Oklahoma filings include:

State withholding reports to the Oklahoma Tax Commission
Unemployment wage reports to the Oklahoma Employment Security Commission

Part 8. Why Employees Sometimes Still Owe Taxes

A common misconception is that if taxes are withheld from a paycheck, the employee should not owe money at filing time.

Payroll withholding is an estimate, not a final calculation.

Common reasons employees still owe taxes include:

Incorrect or outdated W4 information
Multiple jobs or household income not reflected in withholding
Bonuses or irregular pay
Changes in credits or deductions
Differences between federal and Oklahoma withholding

Employers calculate withholding based only on employee forms and payroll information. The final tax liability is determined when the full tax return is prepared.

Part 9. Understanding the True Cost of an Employee

Because of employer matching taxes and unemployment taxes, employees cost more than their wages alone.

For most businesses, employer payroll taxes add approximately 7.65 percent for Social Security and Medicare matching, plus unemployment taxes and insurance where applicable.

Understanding this helps business owners price services correctly and make informed hiring decisions.

Final Thoughts

Income taxes and payroll taxes work together but serve different purposes. Employees see withholding, while employers manage matching contributions, reporting, and compliance behind the scenes.

Understanding both sides removes confusion and allows individuals and business owners to make better financial decisions.

At Eldridge Bookkeeping Solutions, our goal is simple.

Bookkeeping that makes sense so taxes make sense too.