Employer Payroll Tax Rates

Employers pay 15.3% in combined payroll taxes on each employee's wages, split between Social Security and Medicare. This is separate from what the employee pays — it is an additional cost to the employer. The employer portion breaks down as 12.4% for Social Security (on wages up to an annual cap) and 2.9% for Medicare (on all wages with no cap).

These are federal rates that apply everywhere. Some states and cities add their own payroll taxes on top, so the total employer burden varies by location. The federal rates have not changed since 1990, but the wage cap for Social Security increases each year based on inflation.

Key Takeaways

  • Employers pay 12.4% for Social Security on wages up to the annual cap (which changes yearly) and 2.9% for Medicare on all wages with no limit.
  • The employer's share is entirely separate from what employees pay — it is an additional business expense, not deducted from paychecks.
  • State and local payroll taxes can add 1% to 5% or more depending on where the business operates and what type of work is performed.
  • Self-employed people pay both the employer and employee portions themselves, totaling 15.3% plus state taxes.
  • Employers must remit these taxes to the IRS on a schedule (usually monthly or semi-weekly) separate from income tax withholding.

Social Security Tax: The 12.4% Portion

The employer pays 12.4% of each employee's gross wages toward Social Security, but only on earnings up to a wage cap. In 2024, that cap is $168,600 — meaning an employer pays Social Security tax on the first $168,600 of an employee's annual wages, then stops. Once an employee hits that cap in a calendar year, the employer owes no more Social Security tax on that person for the rest of that year.

This cap rises each January based on the national average wage index. An employee earning $200,000 per year will have Social Security tax withheld on only the first $168,600 of their pay; the employer does the same. The employee and employer each pay 12.4% on that capped amount.

Medicare Tax: The 2.9% Portion

The employer pays 2.9% of every employee's gross wages for Medicare, with no wage cap. This means an employee earning $50,000 or $500,000 generates the same 2.9% Medicare tax rate for the employer on all of it. Unlike Social Security, there is no threshold where the tax stops.

Employers with payroll over $250,000 (filing status dependent) also owe an additional 0.9% Medicare tax on wages above that threshold. This is called the Additional Medicare Tax. It applies to both the employer and employee portions combined, though the employee's 0.9% is usually withheld from their paycheck while the employer's 0.9% is a separate liability.

State and Local Payroll Taxes

On top of federal taxes, most states impose their own payroll taxes. Some states tax only the employer, some tax only the employee, and some tax both. Rates vary widely — from under 1% in some states to 5% or more in others. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming) have no state income tax at all, which means no state payroll tax either.

Cities and counties may add payroll taxes as well. San Francisco, New York City, and Washington D.C. all impose employer payroll taxes on top of state and federal rates. An employer in one of these cities may pay 20% or more in total payroll taxes when all layers are combined. You can find your state's rate through your state's Department of Revenue or labor department website.

How Employers Remit Payroll Taxes

Employers do not pay payroll taxes once a year. Instead, they remit them on a schedule set by the IRS based on how much payroll tax they owe. Most small employers remit monthly; larger employers remit semi-weekly or even more frequently. The employer must deposit the taxes they have withheld from employee paychecks plus their own employer share into an IRS account, usually through the Electronic Federal Tax Payment System (EFTPS).

Failure to remit on time results in penalties and interest. The IRS treats payroll tax as a trust fund liability — money withheld from employees that the employer holds in trust to send to the government. Mishandling payroll taxes can result in personal liability for business owners, even if the business itself cannot pay.

Self-Employed Payroll Tax Obligations

Self-employed people and sole proprietors pay both the employer and employee portions of payroll tax themselves. This is called self-employment tax and totals 15.3% (12.4% for Social Security on capped wages, 2.9% for Medicare on all income). A self-employed person earning $100,000 owes roughly $15,300 in federal self-employment tax alone, plus state taxes if applicable.

Self-employed people report this on Schedule SE (Self-Employment Tax) attached to their Form 1040 tax return. They can deduct half of their self-employment tax as a business expense, which reduces their taxable income slightly. Unlike employees, self-employed people do not have taxes withheld from income — they either pay quarterly estimated taxes or settle the full amount when they file their annual return.

Payroll Tax Deductions for Employers

Employers can deduct payroll taxes as a business expense, which lowers their taxable income. If a business owes $50,000 in payroll taxes in a year, that $50,000 reduces the business's taxable profit. This is different from income tax withholding, which is not deductible — the employer is simply holding employee money and sending it to the government.

Some employers also offer tax-advantaged benefits like health insurance or retirement plans that reduce the wages subject to payroll tax. For example, if an employee contributes to a traditional 401(k), that contribution is deducted from gross wages before payroll tax is calculated, lowering both the employee's and employer's tax burden on that portion of pay.

Frequently Asked Questions

Do employers pay payroll tax on bonuses and overtime?

Yes. Payroll tax applies to all compensation — wages, bonuses, overtime, commissions, and most other forms of pay. The same rates apply: 12.4% for Social Security (up to the annual cap) and 2.9% for Medicare on the full amount. If a bonus pushes an employee over the Social Security wage cap, the employer stops paying Social Security tax on amounts above the cap but continues paying Medicare tax.

What if an employee is paid under the table?

The employer still owes payroll taxes whether or not they report the wages. Failing to remit payroll taxes on unreported wages is tax evasion and can result in criminal penalties, back taxes with interest, and fines. The IRS pursues these cases actively. Employees who are not reported also have no Social Security credits, no unemployment insurance, and no workers' compensation coverage.

Do employers pay payroll tax on independent contractors?

No. Independent contractors are responsible for their own self-employment tax. The business pays them a flat fee or hourly rate with no payroll taxes withheld or paid by the employer. However, the IRS has strict rules about who qualifies as an independent contractor versus an employee. Misclassifying an employee as a contractor to avoid payroll taxes can result in back taxes, penalties, and interest.

Does payroll tax apply to unpaid interns or volunteers?

Unpaid interns and volunteers do not generate payroll tax because there is no wage. However, if an intern or volunteer receives any compensation — even a small stipend or reimbursement for expenses — payroll tax may apply depending on the amount and circumstances. Check with a payroll professional or the IRS if you are unsure whether a particular arrangement triggers payroll tax.

Can employers reduce payroll taxes by paying employees less?

Reducing wages reduces payroll taxes proportionally, but it also reduces employee take-home pay and Social Security benefits. Some employers offer non-wage benefits (health insurance, transit passes, dependent care accounts) that reduce taxable wages while still providing value to employees. These must meet IRS rules to may have access to. Simply cutting wages is legal but affects both the business and the employee's future benefits.