Your employer pays a percentage of your wages to federal and state payroll taxes, separate from what they withhold from your paycheck

Your employer pays Social Security tax at 6.2% of your wages and Medicare tax at 1.45% of your wages. These are employer-side taxes that come directly from the company's budget, not from your paycheck. On top of that, most employers pay state unemployment insurance (UI) tax, which varies by state and by industry. The federal unemployment tax (FUTA) is a flat 0.6% on the first $7,000 of each employee's annual wages. Some states also require employers to fund a state disability insurance program or paid family leave program.

The total employer payroll tax burden is typically between 7.65% and 12% of gross wages, depending on the state and the type of business. This is money the employer owes in addition to your salary. It does not reduce your take-home pay, but it does increase the total cost to the employer of hiring you.

Key Takeaways

  • Employers pay 6.2% Social Security tax and 1.45% Medicare tax on every employee's wages, totaling 7.65% in federal employer payroll taxes.
  • State unemployment insurance tax rates vary by state and employer history, typically ranging from 0.5% to 5.4% of wages.
  • Federal unemployment tax (FUTA) is 0.6% on the first $7,000 of each employee's annual wages, capped at $42 per employee per year.
  • Some states require employers to fund disability insurance or paid family leave programs, which adds to the employer's payroll tax cost.
  • Employer payroll taxes are separate from income tax withholding and do not appear on your paycheck stub.

Social Security and Medicare taxes employers pay

The Federal Insurance Contributions Act (FICA) requires employers to pay 6.2% for Social Security and 1.45% for Medicare on each employee's wages. These rates are set by federal law and do not change based on state or industry. The Social Security portion applies only to wages up to an annual cap (in 2024, that cap is $168,600, but it adjusts each year). Medicare tax has no wage cap, so employers pay 1.45% on all wages, no matter how high.

These taxes fund the Social Security and Medicare programs. The employer's contribution is matched by a withholding from your paycheck, so the total going into these programs is 12.4% for Social Security and 2.9% for Medicare. Self-employed people pay both the employer and employee portions themselves.

State unemployment insurance tax

Every state except a few territories requires employers to pay state unemployment insurance (UI) tax. The rate varies significantly by state and by the employer's industry and history. A new employer in most states pays somewhere between 2% and 3% of wages. An employer with a long history of stable employment and few layoffs may pay as little as 0.5%. An employer in an industry with high turnover or a company with frequent layoffs may pay 5% or higher.

States set their own UI tax rates and wage bases. Some states tax all wages; others tax only the first $7,000 to $15,000 per employee per year. You can find your state's current rate on your state's labor department website. The UI tax funds unemployment benefits when workers are laid off or lose their job through no fault of their own.

Federal unemployment tax (FUTA)

The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal unemployment tax of 0.6% on the first $7,000 of each employee's annual wages. This caps out at $42 per employee per year. Most employers can take a credit against their federal tax liability if they pay their state UI tax on time, which effectively reduces the federal rate to 0.06% for employers in good standing.

FUTA funds the federal unemployment insurance program and provides extended benefits during recessions. Unlike state UI tax, the federal rate is the same across all states and industries.

State disability and paid family leave taxes

A handful of states require employers to fund state disability insurance (SDI) or paid family leave (PFL) programs. California, New Jersey, New York, and Rhode Island have mandatory SDI programs. California, New Jersey, New York, Washington, and Washington D.C. have mandatory PFL programs. In some of these states, the cost is split between employer and employee; in others, the employee bears the full cost through payroll deduction.

The rates and wage bases for these programs vary by state and change annually. For example, California's SDI rate in 2024 is 1.0% of wages up to a certain cap, but the employee typically pays this, not the employer. Conversely, some states' PFL programs are funded entirely by employer contributions. Check your state's labor department website for the current rates and who pays.

How employer payroll taxes affect hiring costs

When a company budgets for an employee, the total cost is the salary plus all payroll taxes. If you earn $50,000 per year, the employer's cost is roughly $50,000 plus 7.65% in federal FICA taxes ($3,825), plus state UI tax (which might be another $1,000 to $2,500 depending on the state), plus FUTA ($42), plus any state disability or PFL contributions. The total employer cost could be $55,000 to $57,000 or more.

This is why employers sometimes negotiate salary based on total cost rather than gross pay. It is also why some small businesses are sensitive to increases in payroll tax rates — the cost directly affects their hiring budget.

Frequently Asked Questions

Do employer payroll taxes come out of my paycheck?

No. Employer payroll taxes are paid by the company from its own budget. Your paycheck shows only employee withholdings: income tax, your half of Social Security and Medicare (6.2% and 1.45%), and any voluntary deductions. The employer's 6.2% and 1.45% are separate and do not appear on your stub.

What is the difference between employer and employee payroll taxes?

Employees pay 6.2% Social Security and 1.45% Medicare, withheld from their paycheck. Employers pay the same rates from company funds. Together, they fund the Social Security and Medicare programs. Employers also pay unemployment taxes; employees do not.

Does my employer's payroll tax rate change if I make more money?

The Social Security tax rate stays at 6.2%, but only applies to wages up to the annual cap ($168,600 in 2024). Above that cap, no Social Security tax is owed. Medicare tax at 1.45% applies to all wages with no cap. State UI tax rates do not change based on individual employee wages, only on the employer's overall history and industry.

Can an employer deduct payroll taxes from my salary?

No. Employer payroll taxes are the employer's legal obligation and cannot be passed to the employee by reducing salary. If an employer tries to do this, it is wage theft. Employee withholdings (income tax, employee Social Security, employee Medicare) are separate and are deducted from your paycheck before you receive it.

Why do some states have higher employer payroll taxes than others?

State unemployment insurance rates are set by each state based on the cost of unemployment benefits in that state and the employer's history of layoffs. States with higher unemployment or more generous benefits typically charge higher UI tax rates. Disability and paid family leave programs also vary by state, adding to the total employer tax burden in some states.