Employers pay 15.3% of each employee's wages in federal payroll taxes

The employer's share breaks into two parts: 6.2% for Social Security and 2.9% for Medicare. These are matched taxes — the employee pays the same percentages from their paycheck, so the total that funds these programs is 12.4% for Social Security and 5.8% for Medicare. The employer sends both the employee's portion and their own portion to the IRS, along with income tax withholding.

The Social Security portion only applies to wages up to an annual cap. For 2024, that cap is $168,600, meaning an employer stops paying the 6.2% Social Security tax once an employee's wages exceed that amount in a single year. Medicare tax has no wage cap — employers pay 2.9% on all wages, no matter how high. Additionally, employers pay an extra 0.9% Medicare tax on wages over $200,000 per employee per year.

These are federal taxes only. Most states also impose state payroll taxes, and some cities add local payroll taxes. The state and local rates vary widely — some states have no payroll tax at all, while others range from 0.5% to over 6%. An employer in New York City, for example, pays both state and city payroll taxes on top of the federal amount.

Key Takeaways

  • Federal payroll taxes cost employers 15.3% of wages: 6.2% for Social Security (capped at $168,600 annual wages per employee in 2024) and 2.9% for Medicare with no cap.
  • Employers remit both their own payroll tax share and the employee's share to the IRS, making the total Social Security and Medicare funding 12.4% and 5.8% respectively.
  • State and local payroll taxes vary by location and can add 0.5% to 6% or more to the employer's total payroll tax burden.
  • The wage cap for Social Security resets each calendar year, so an employee who changes jobs mid-year may have Social Security tax withheld by multiple employers.

How the employer's share gets calculated and paid

Payroll taxes are calculated on gross wages — the full amount before any deductions. If an employee earns $50,000 per year, the employer calculates 6.2% of $50,000 ($3,100) for Social Security and 2.9% of $50,000 ($1,450) for Medicare. These amounts come out of the employer's operating budget, not the employee's paycheck. The employee sees their own 6.2% and 2.9% deducted from their pay stub, but the employer's portion is a separate business expense.

Employers remit payroll taxes to the IRS on a schedule that depends on the size of the payroll. Most small employers pay quarterly, filing Form 941 and sending the money by the 15th of the month following the quarter. Larger employers may be required to pay semi-weekly or even more frequently. The employer bundles the employee's income tax withholding, the employee's payroll taxes, and the employer's payroll taxes into one payment to the IRS.

At the end of the year, the employer files Form 940 (federal unemployment tax) and provides each employee with a W-2 showing gross wages and all taxes withheld. The employer also files state and local payroll tax returns according to each jurisdiction's schedule.

Why the wage cap matters for high-earning employees

The Social Security wage cap creates a significant difference in tax burden for high earners. An employee making $168,600 per year pays Social Security tax on every dollar. An employee making $300,000 per year pays Social Security tax only on the first $168,600, then pays nothing on the remaining $131,400. The employer follows the same rule — they stop paying the 6.2% Social Security tax once the employee's annual wages hit the cap.

This cap resets on January 1 each year. If an employee works for one employer for the full year and earns $168,600, both the employee and employer stop paying Social Security tax after that point. If the same employee changes jobs mid-year and earns $100,000 at the first job and $100,000 at the second job, both employers will withhold and pay Social Security tax on their full $100,000 portion, even though the employee has now paid Social Security tax on $200,000 total. The employee can claim a credit on their tax return for the overpayment, but the employer has no mechanism to coordinate across multiple employers.

Medicare tax has no wage cap, so employers continue paying 2.9% on all wages regardless of how much the employee earns. High earners also trigger the additional 0.9% Medicare tax, which the employer must withhold from the employee's pay and remit to the IRS.

State and local payroll taxes add to the employer's cost

Federal payroll taxes are uniform across the country, but state and local taxes vary dramatically. Some states — including Texas, Florida, Nevada, South Dakota, Tennessee, Washington, and Wyoming — have no state payroll tax at all. Other states impose taxes ranging from less than 1% to over 6% of wages. California, for example, has a state payroll tax that funds its disability insurance program. New York imposes both a state payroll tax and, in New York City, an additional city payroll tax.

An employer operating in multiple states must track and pay the payroll tax rate for each state where employees work. An employee who works partly in one state and partly in another may have their wages split between the two states' tax systems. This complexity is why many employers use payroll processing services — the service handles the calculations and filings for each state and locality.

Some states also impose unemployment insurance taxes on employers, separate from payroll taxes. These rates vary by state and by industry, and they fund state unemployment benefits. An employer in a state with high unemployment claims may pay a higher rate than an employer in a state with low claims.

Self-employed people pay both sides of payroll tax

A self-employed person or business owner pays both the employee and employer share of Social Security and Medicare taxes, totaling 15.3%. This is called the self-employment tax. A self-employed person earning $50,000 pays 15.3% of that amount ($7,650) in federal payroll taxes, whereas an employee earning $50,000 and an employer together pay 15.3% split between them.

Self-employed people report self-employment tax on Schedule SE and pay it along with their income tax return. They can deduct half of their self-employment tax as a business expense, which reduces their taxable income slightly, but they still bear the full 15.3% cost.

Payroll tax obligations for different business structures

The payroll tax rules apply to all employers — sole proprietors with employees, partnerships, corporations, nonprofits, and government agencies. A nonprofit organization pays the same 15.3% federal payroll tax on employee wages as a for-profit business, though nonprofits are exempt from federal unemployment tax. A government agency pays payroll taxes into the Social Security and Medicare systems, though the rules vary slightly by agency type.

A sole proprietor with no employees does not pay payroll taxes on their own income — they pay self-employment tax instead. The moment a sole proprietor hires an employee, they become an employer and must pay payroll taxes on that employee's wages. A business structured as an S-corporation or LLC may have different rules depending on how the owner takes income, so many business owners consult a tax professional to understand their specific obligations.

What happens if an employer doesn't pay payroll taxes

Payroll taxes are a trust fund — the employer collects them from employees' paychecks and holds them in trust for the government. Failing to pay payroll taxes is treated as a serious violation. The IRS can impose penalties of 75% or more of the unpaid amount, plus interest that accrues daily. The employer remains liable even if the business closes or files bankruptcy.

In some cases, the IRS can hold individual owners, officers, or managers personally liable for unpaid payroll taxes through the responsible person penalty. This means a business owner cannot shield themselves from payroll tax debt by dissolving the company. Additionally, unpaid payroll taxes can trigger criminal prosecution in cases of willful evasion.

Employers who face cash flow problems should contact the IRS to discuss payment plans or temporary relief rather than simply not paying. The IRS has programs for businesses in hardship, and negotiating is far less costly than penalties and interest.

Frequently Asked Questions

Do employers pay payroll taxes on tips?

Yes. Employers must pay payroll taxes on reported tips, even though the employee received the money directly from customers. If an employee reports $5,000 in tips, the employer calculates and pays payroll taxes on that $5,000 as if it were wages. The employee's paycheck may be reduced to account for tips, but the employer's payroll tax obligation remains the same.

What if an employee is paid under the table?

Paying an employee cash without reporting it to the IRS is illegal. The employer is still liable for payroll taxes, penalties, and interest if discovered. The IRS pursues these cases, and the penalties are substantial. Employees who are paid under the table also have no Social Security credits, no unemployment insurance protection, and no workers' compensation coverage.

Do employers pay payroll taxes on bonuses and commissions?

Yes. Bonuses, commissions, and any other form of compensation are subject to payroll taxes at the same rates as regular wages. The only exception is certain fringe benefits that the IRS specifically excludes, such as health insurance premiums paid by the employer or transit passes under a certain value.

Can an employer deduct payroll taxes from their business income?

Yes. The employer's share of payroll taxes is a business expense and reduces taxable business income. This is different from income tax withholding, which is not deductible because it belongs to the employee. The employer's 15.3% payroll tax contribution is deductible; the employee's portion is not.

Do payroll taxes change every year?

The Social Security wage cap and the Medicare tax rates can change. The Social Security cap is adjusted annually based on wage growth. The Medicare tax rates have remained stable for many years, but Congress can change them. State and local payroll tax rates also change periodically. Employers should review their payroll tax obligations at the start of each year.