Employer payroll tax is a percentage of what you pay your employees, split between Social Security and Medicare

Employer payroll tax is not one tax — it is two separate taxes your business owes on employee wages. The Social Security portion is 6.2 percent of each employee's gross pay, up to a wage cap that changes yearly (in 2024 it is $168,600). The Medicare portion is 1.45 percent of all gross pay with no wage cap. Together, that is 7.65 percent of payroll before any other deductions or credits apply.

You owe this tax on top of what you pay employees — it does not come out of their paychecks. Your employees pay an identical 6.2 percent and 1.45 percent on their end, which you withhold from their wages. The employer and employee portions are separate obligations.

Self-employed people pay both sides themselves, which is why their rate is roughly double. W-2 employees never see the employer portion — it is a business expense you report and pay to the IRS.

Key Takeaways

  • Employer payroll tax is 7.65 percent of employee wages: 6.2 percent for Social Security (capped at $168,600 in 2024) and 1.45 percent for Medicare (no cap).
  • You pay this tax separately from employee wages and separately from income tax withholding.
  • The Social Security wage cap means you stop owing the 6.2 percent tax once an employee reaches that annual earnings threshold, but the Medicare tax continues all year.
  • You report and pay employer payroll tax quarterly to the IRS using Form 941, or more frequently if your payroll is large.
  • Some employers in specific industries or situations may owe additional payroll taxes or be exempt from certain portions.

How the Social Security and Medicare portions work differently

The Social Security tax (6.2 percent) has a wage cap. Once an employee earns $168,600 in a calendar year (the 2024 limit), you stop owing the 6.2 percent tax on their additional earnings that year. The cap resets January 1. This means a salaried employee earning $200,000 per year will only trigger the 6.2 percent tax on the first $168,600 of that salary.

The Medicare tax (1.45 percent) has no cap. You owe it on every dollar an employee earns, all year. There is also an additional 0.9 percent Medicare tax on wages over $200,000 per employee per year (or $250,000 for married couples filing jointly if both work), but that is typically withheld from the employee's paycheck, not paid by the employer.

The wage cap changes most years. The Social Security Administration publishes the new limit in October for the following year, so you will see updates announced in the fall.

When you owe employer payroll tax

You owe employer payroll tax on the wages of any employee on your payroll. This includes full-time, part-time, and temporary workers. You do not owe it on independent contractors — they are responsible for their own self-employment tax.

The tax is due based on your payroll schedule. If you pay employees weekly, you calculate and owe the employer portion weekly. If you pay biweekly or monthly, the tax is due on the same schedule. You do not pay it all at once at year-end; it is a recurring obligation tied to each payroll cycle.

Certain types of workers are exempt or have different rules. Household employees, agricultural workers, and employees of certain nonprofits or government agencies may have different payroll tax obligations. If you employ people in these categories, check with the IRS or a payroll professional about your specific situation.

How to report and pay employer payroll tax

You report employer payroll tax on Form 941, the Employer's Quarterly Federal Tax Return. You file this form every three months, covering a calendar quarter (January–March, April–June, July–September, October–December). The form shows how much you withheld from employee paychecks and how much employer tax you owe.

Payment frequency depends on how much payroll tax you owe. Most small employers pay quarterly along with Form 941. If you owe $50,000 or more in payroll taxes in a quarter, you must pay more frequently — usually monthly or even semi-weekly. The IRS has a lookback period to determine your payment schedule, so your 2024 payment frequency is based on your 2023 tax liability.

You can pay through the IRS Electronic Federal Tax Payment System (EFTPS), through your bank, or through a payroll service. Most payroll software calculates the amount owed and can file Form 941 for you. Penalties for late payment or filing are steep, so staying on schedule matters.

Examples of employer payroll tax on different payrolls

A business with one employee earning $50,000 per year owes approximately $3,825 in employer payroll tax annually ($50,000 × 0.0765). That breaks down to about $3,100 in Social Security tax and $725 in Medicare tax.

A business with five employees averaging $40,000 per year has a total payroll of $200,000. The employer payroll tax is approximately $15,300 annually ($200,000 × 0.0765). Paid quarterly, that is roughly $3,825 per quarter.

A business with one employee earning $200,000 per year owes approximately $12,087 in employer payroll tax. This is lower than 7.65 percent of $200,000 because the Social Security portion stops at $168,600. The calculation is ($168,600 × 0.062) + ($200,000 × 0.0145) = $10,453 + $2,900 = $13,353. (The additional Medicare tax does not apply to the employer.)

Deductions and credits that reduce employer payroll tax

Employer payroll tax itself cannot be reduced by credits, but it is deductible as a business expense on your tax return. This means the cost of payroll tax lowers your overall business income tax liability.

Some employers may be may be able to access for the Work Opportunity Tax Credit (WOTC), which is a federal tax credit for hiring people from certain groups (veterans, long-term unemployed, ex-felons, and others). This credit reduces your income tax, not your payroll tax directly, but it can offset some of the cost of hiring.

Certain nonprofits and government agencies are exempt from payroll tax on some or all employees. If you operate a tax-exempt organization, you may still owe payroll tax on most employees, but the rules vary by organization type. Check with the IRS or a tax professional about your specific status.

Frequently Asked Questions

Do I owe employer payroll tax on bonuses and commissions?

Yes. Bonuses, commissions, and any other compensation count as wages for payroll tax purposes. You owe the same 7.65 percent employer tax on these payments as you do on regular salary. If a bonus pushes an employee over the Social Security wage cap for the year, the 6.2 percent portion does not apply to the amount over the cap.

What happens if I don't pay employer payroll tax on time?

The IRS charges penalties and interest. Penalties start at 2 percent of the unpaid tax for payments up to 5 days late, and increase to 10 percent or more for longer delays. Interest accrues daily. The IRS can also place a lien on your business assets or pursue collection action. Payroll tax is treated as a priority debt because it includes employee withholdings.

Do I owe employer payroll tax on workers' compensation or health insurance premiums I pay?

No. Employer-paid health insurance premiums and workers' compensation insurance are not subject to payroll tax. They are business expenses but do not count as employee wages for tax purposes. However, any taxable fringe benefits (like a company car used for personal use) may be subject to payroll tax.

Can I use a payroll service to handle employer payroll tax?

Yes, and most small businesses do. Payroll services like ADP, Gusto, and Paychex calculate the employer portion, withhold the employee portion, and file Form 941 for you. They typically charge a monthly fee per employee. Using a service reduces errors and ensures you stay on schedule with the IRS.

What if I hire someone mid-year — do I owe payroll tax on their full salary?

Yes, you owe employer payroll tax on every dollar they earn from their hire date forward. The Social Security wage cap is annual, so if you hire someone in July earning $100,000 for the rest of the year, you owe the 6.2 percent tax on all of it (since $100,000 is under the $168,600 cap). If they earn more than the cap by year-end, the 6.2 percent stops once they cross it.