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

The employer's share breaks down as 12.4% for Social Security and 2.9% for Medicare. These are separate from what you withhold from an employee's paycheck — they are taxes the business itself owes. Most states also require unemployment insurance tax, which varies by state and by your company's history of claims. The total employer burden is usually between 15% and 16% of payroll, depending on state requirements and whether you have seasonal or temporary workers.

Unlike income tax withholding, which is money you hold from the employee's gross pay, employer payroll taxes come directly from the business. A business with $500,000 in annual payroll will owe roughly $75,000 to $80,000 in employer payroll taxes per year, before state unemployment insurance.

Key Takeaways

  • Employers pay 12.4% for Social Security and 2.9% for Medicare on each employee's wages, totaling 15.3% in federal payroll tax.
  • These employer taxes are separate from employee withholding and come directly from the business, not from the employee's paycheck.
  • Most states require unemployment insurance tax on top of federal payroll tax, with rates ranging from under 1% to over 5% depending on the state and the employer's claim history.
  • Self-employed people pay both the employer and employee share of Social Security and Medicare, totaling 15.3% on net business income.
  • There is a wage cap for Social Security tax ($168,600 in 2024), meaning employers stop paying the 12.4% rate once an employee exceeds that amount in a calendar year.

The 15.3% federal payroll tax split between Social Security and Medicare

The 12.4% Social Security portion funds retirement, disability, and survivor benefits. The 2.9% Medicare portion funds hospital insurance for people 65 and older and some younger people with disabilities. Both rates are set by federal law and do not change based on the employee's age, salary level, or how long they have worked for you.

You pay these taxes on every dollar of wages you pay an employee, up to the annual Social Security wage cap. For 2024, that cap is $168,600 per employee. Once an employee's wages hit that amount in a calendar year, you stop paying the 12.4% Social Security tax on additional earnings, but you continue paying 2.9% Medicare tax with no cap.

These taxes are due quarterly. You report them on Form 941 (Employer's Quarterly Federal Tax Return) and deposit them through the Electronic Federal Tax Payment System (EFTPS) or through your payroll provider. Missing a deposit deadline can result in penalties and interest.

State unemployment insurance tax varies widely by location and claim history

Every state except South Dakota, Wyoming, and Nevada requires employers to pay unemployment insurance tax. Rates range from under 1% to over 5% of payroll, depending on the state and your company's unemployment claim history. A new business in most states starts at the standard rate for that state, which is usually between 2% and 3%.

Your rate can go down if your employees rarely file claims, or up if claims are frequent. This is called "experience rating" or "merit rating." A company with a good track record may pay 0.5% in one state, while a company with many layoffs or terminations may pay 4% or more in the same state. The wage base also varies — some states tax only the first $7,000 of each employee's annual wages, while others tax up to $50,000 or more.

You report state unemployment tax separately from federal payroll tax, usually quarterly or annually depending on the state. Some states allow you to pay through your payroll provider; others require direct payment to the state.

How the wage cap affects what you owe

The Social Security wage cap means you do not pay 12.4% on all earnings — only on earnings up to $168,600 per employee in 2024. The cap increases each year based on average wage growth. If you have an employee earning $200,000 per year, you pay 12.4% Social Security tax only on the first $168,600, then nothing on the remaining $31,400.

Medicare tax has no cap, so you pay 2.9% on every dollar, no matter how high the salary. Additionally, there is a 0.9% Additional Medicare Tax that applies to employees earning over $200,000 (or $250,000 for married couples filing jointly), but employers do not pay this — it is withheld from the employee's paycheck.

The wage cap resets on January 1 each year. An employee who earned $168,600 in 2024 will have a fresh cap in 2025, and you will owe Social Security tax on their 2025 earnings up to the new cap amount.

Self-employed people pay both sides of payroll tax

If you are self-employed, you pay both the employer and employee share of Social Security and Medicare, totaling 15.3% on your net business income. This is called self-employment tax. You calculate it on Schedule SE (Self-Employment Tax) and report it with your personal income tax return.

Self-employed people can deduct half of their self-employment tax as a business expense on their income tax return, which reduces the effective rate slightly. You still owe the full 15.3%, but the deduction lowers your taxable income.

Payroll tax deposits and reporting deadlines

Federal payroll taxes are due quarterly, with deposits made through EFTPS or a payroll service. The deposit schedule depends on how much tax you owe. Most small businesses deposit monthly or semi-weekly. Missing a deposit deadline triggers a penalty, usually 2% to 15% of the unpaid amount depending on how late the payment is.

You report federal payroll taxes on Form 941 (Employer's Quarterly Federal Tax Return), due the last day of the month following the end of each quarter. State unemployment tax is reported separately, usually on a state-specific form, with deadlines that vary by state.

If you use a payroll provider like ADP, Gusto, or Paychex, they typically handle deposits and reporting for you. If you process payroll yourself, you are responsible for calculating, depositing, and reporting on time.

What happens if you do not pay employer payroll taxes

Unpaid payroll taxes are among the most serious tax debts a business can owe. The IRS can pursue the business, and in some cases, the IRS can hold business owners personally liable for unpaid payroll taxes through the "responsible person" rule. This means you can be personally sued even if the business is a corporation or LLC.

Penalties for late payment start at 2% if you pay one to five days late, and increase to 15% if you pay more than 120 days late. Interest accrues daily on unpaid taxes. If you cannot pay in full, you can request a payment plan or an offer in compromise, but you must contact the IRS before the debt becomes too large.

Frequently Asked Questions

Do I have to pay employer payroll tax on tips my employees receive?

No. You pay payroll tax only on wages you pay directly. Tips are not wages, so you do not owe employer payroll tax on them. However, employees must report tips as income on their tax returns, and you must withhold income tax and employee payroll tax from their reported tips.

What if I hire an independent contractor instead of an employee?

You do not pay employer payroll tax on payments to independent contractors. The contractor is responsible for paying self-employment tax on the income they receive. However, you must issue them a Form 1099-NEC if you pay them $600 or more in a year, and the IRS scrutinizes misclassification, so make sure the worker truly qualifies as a contractor.

Do I pay employer payroll tax on bonuses and commissions?

Yes. Bonuses, commissions, and any other compensation you pay an employee count as wages for payroll tax purposes. You owe the full 15.3% federal payroll tax plus state unemployment tax on these amounts, subject to the Social Security wage cap.

Can I deduct employer payroll taxes as a business expense?

Yes. Employer payroll taxes are a deductible business expense on your tax return. You report them on Schedule C (if you are self-employed) or on your business income tax return. This is separate from the deduction for employee wages themselves.

What if an employee works part-time or seasonally?

You pay the same payroll tax rate on part-time and seasonal workers as on full-time employees. The rate does not change based on hours worked or length of employment. However, your state unemployment insurance rate may be lower if you have a history of seasonal layoffs, because those workers typically file for unemployment benefits.