Employers pay 15.3% of each employee's wages in federal payroll taxes, split between Social Security and Medicare

An employer's payroll tax bill has two parts: Social Security tax at 6.2% and Medicare tax at 1.45% of each employee's gross wages. These are matched taxes — the employee pays the same percentage from their paycheck, and the employer sends an equal amount to the IRS. There is also an additional Medicare tax of 0.9% that employers must withhold from employees who earn over a certain threshold, though the employer does not match this portion.

The employer's share is separate from income tax withholding. You do not deduct payroll taxes from what you owe employees; you pay them on top of wages. A $50,000 annual salary costs an employer $7,650 in federal payroll taxes alone, before state and local taxes enter the picture.

These taxes fund Social Security retirement and disability benefits, and Medicare hospital insurance. The IRS calls the employer's portion the "employer's share of Social Security and Medicare taxes," and it must be deposited on a schedule that depends on how much you owe — usually monthly or semi-weekly for most small businesses.

Key Takeaways

  • Employers pay 6.2% for Social Security and 1.45% for Medicare on each employee's wages, totaling 7.65% before any state or local taxes.
  • The employer's payroll tax is separate from income tax withholding and is paid in addition to the employee's gross salary.
  • Payroll taxes must be deposited with the IRS on a schedule based on how much tax you owe — usually monthly for small employers.
  • State and local payroll taxes vary by location and can add significantly to the total cost of employment.
  • Self-employed people pay both the employee and employer share, totaling 15.3% in federal payroll taxes on net business income.

How the 15.3% breaks down between Social Security and Medicare

Social Security tax is 6.2% of wages up to a wage base limit. For 2024, that limit is $168,600 — meaning once an employee earns that much in a year, you stop paying Social Security tax on additional wages. Medicare tax is 1.45% with no wage limit, so you pay it on every dollar an employee earns. Together, these are 7.65% of all wages.

The additional Medicare tax of 0.9% applies to employees earning over $200,000 (single filers) or $250,000 (married filing jointly). The employer must withhold this from the employee's paycheck but does not pay a matching share. This tax goes to Medicare and has no wage cap.

The wage base limit for Social Security changes each year based on inflation. Check the IRS website or your payroll software to confirm the current year's limit, because missing the cutoff can result in overpaying or underpaying throughout the year.

State and local payroll taxes add to the federal bill

Federal payroll taxes are only part of the cost. Most states impose their own payroll taxes, and some cities do as well. State unemployment insurance (SUI) tax is mandatory in every state except South Dakota, Wyoming, Nevada, Texas, and Washington. The rate varies by state and by your industry, but typically ranges from 0.5% to 5.4% of wages, with a wage base limit that differs from the federal limit.

Some states also tax employers for state disability insurance, paid family leave, or other programs. California, for example, requires employers to contribute to its State Disability Insurance (SDI) program. New York has a paid family leave tax. These vary widely, so you need to check your specific state's requirements.

A few cities — including San Francisco, Washington D.C., and parts of Illinois — impose local payroll taxes on employers. These are typically small (under 1%) but add another line to your tax bill. Your payroll software or state labor department can tell you which taxes apply to your business.

When and how employers deposit payroll taxes

Payroll taxes are not paid when you run payroll. Instead, you deposit them with the IRS on a schedule determined by how much tax you owe. The IRS uses a lookback period — typically the prior four quarters — to sort you into a deposit schedule. Most small employers are on a monthly schedule, meaning taxes are due by the 15th of the following month. Larger employers are on a semi-weekly schedule, with deposits due on Wednesday or Friday depending on when payroll was run.

You report all federal payroll taxes quarterly on Form 941 (Employer's Quarterly Federal Tax Return), which reconciles what you deposited against what you actually owe. State unemployment taxes are usually reported and paid quarterly or annually, depending on your state. Your payroll provider typically handles the calculations and can set up automatic deposits so you do not miss a deadline.

Missing a deposit deadline results in penalties and interest. The penalty starts at 2% of the unpaid tax and increases based on how late the payment is. Setting up automatic deposits through the IRS's Electronic Federal Tax Payment System (EFTPS) or through your bank removes the risk of a missed deadline.

How payroll taxes differ for different business structures

If you are a sole proprietor or partner in a partnership, you pay both the employee and employer share of payroll taxes on your net business income — 15.3% total in federal payroll taxes. This is called self-employment tax. You report it on Schedule SE and pay it with your individual income tax return, usually quarterly through estimated tax payments.

If you are an S-corporation or C-corporation owner, you are an employee of your own business. You pay the standard 7.65% employer share on wages you pay yourself, and you withhold 7.65% from your paycheck. The difference is that S-corp owners can sometimes reduce their payroll tax bill by taking a portion of business income as a distribution rather than wages, though this strategy has limits and IRS scrutiny.

LLC owners are taxed as sole proprietors by default, unless they choose to be taxed as an S-corp or C-corp. The business structure you choose affects not just payroll taxes but also income tax, liability, and complexity — so consult a tax professional before deciding.

Payroll tax credits and deductions that reduce the employer's cost

The federal government offers several credits that can reduce your payroll tax bill. The Work Opportunity Tax Credit (WOTC) provides a credit of up to $2,400 per employee if you hire from certain groups (veterans, ex-felons, long-term unemployed, etc.). The Earned Income Tax Credit (EITC) allows employers to reduce withholding for employees who claim the credit, lowering the cash flow burden during the year.

Some employers in economically distressed areas or who hire from specific populations may be may be able to access for other credits. The IRS website lists current credits, and your tax professional can determine which ones apply to your business. These credits reduce your actual tax liability, not just the amount you withhold — so they directly lower what you owe.

Payroll taxes themselves are not deductible as a business expense on your income tax return, because they are a tax, not a business cost. However, wages are deductible, and the payroll taxes are calculated on those wages.

What happens if you do not pay payroll taxes on time

Unpaid payroll taxes are treated seriously by the IRS. Penalties start at 2% of the unpaid amount if you are 1 to 5 days late, and increase to 15% if you are more than 120 days late. Interest accrues daily at the federal rate plus 3%. If the IRS determines that you willfully failed to pay, criminal charges are possible, including fines and imprisonment.

The IRS can also pursue the business owner personally through the Trust Fund Recovery Penalty (TFRP), which holds responsible persons liable for unpaid payroll taxes. This means if your business cannot pay, the IRS can go after your personal assets. This penalty applies to anyone who had authority over the funds and knew taxes were not being paid.

If you fall behind, contact the IRS or a tax professional immediately. The IRS offers payment plans and can sometimes reduce penalties if you show good faith effort to catch up. Waiting makes the problem worse.

Frequently Asked Questions

Do I have to pay payroll taxes if I have only one employee?

Yes. Payroll tax obligations apply regardless of the number of employees. Even if you have one part-time employee, you must withhold and pay payroll taxes. The only exception is if you are self-employed with no employees — in that case, you pay self-employment tax on your net business income instead.

Can I deduct payroll taxes from employee wages?

No. Payroll taxes are the employer's legal obligation. You withhold the employee's share (7.65% federal) from their paycheck, but the employer's share (7.65% federal) is paid separately by the business. You cannot reduce an employee's wages to cover your payroll tax cost.

What if an employee works part of the year?

You pay payroll taxes on all wages paid, regardless of how long the employee worked. If someone earns $10,000 in three months, you pay payroll taxes on the full $10,000. The Social Security wage base limit still applies — once they earn $168,600 in a year, you stop paying Social Security tax on additional wages.

Do I pay payroll taxes on contractor payments?

No. Independent contractors are responsible for their own payroll taxes (self-employment tax). You do not withhold or pay payroll taxes on contractor payments. You report contractor payments on Form 1099-NEC if they earn over $600 in a year. Misclassifying an employee as a contractor can result in back taxes, penalties, and interest.

How do I know if I am on a monthly or semi-weekly deposit schedule?

The IRS determines your schedule based on payroll taxes owed during a lookback period. You can find your schedule in your IRS online account or ask your payroll provider. If you are unsure, assume semi-weekly and deposit more often — depositing early does not create a penalty, but depositing late does.