What employer payroll taxes are and why you calculate them

Employer payroll taxes are the taxes your business owes based on what you pay your employees. Unlike income tax withholding (which comes out of the employee's paycheck), employer payroll taxes are your company's direct obligation. You owe them whether or not you withhold them from employee pay. The main ones are Social Security tax, Medicare tax, and federal unemployment tax (FUTA). Some states also require state unemployment insurance tax (SUTA).

You calculate these taxes on the gross wages you pay — the full amount before any deductions. The calculation happens for each pay period: weekly, biweekly, semimonthly, or monthly, depending on how often you pay your staff. The amounts are small per employee but add up quickly across a payroll, and the IRS expects them on a specific schedule.

Key Takeaways

  • Social Security tax is 6.2% of each employee's gross wages up to an annual wage cap (which changes yearly); Medicare tax is 1.45% with no cap, plus an additional 0.9% Medicare tax on wages over $200,000 per employee per year.
  • Federal unemployment tax (FUTA) is 6% of the first $7,000 in annual wages per employee, but you can claim a credit if you pay state unemployment tax, reducing it to 0.6% in most cases.
  • You deposit employer taxes on a schedule set by the IRS based on how much you owe — either monthly or twice per month — using the Electronic Federal Tax Payment System (EFTPS) or through your payroll provider.
  • State unemployment tax rates and wage bases vary by state and by your industry classification; you report and pay these separately to your state revenue department.
  • Payroll tax forms (Form 941 quarterly, Form 940 annually) reconcile what you deposited against what you actually owed, and mistakes on these forms trigger IRS notices and penalties.

Social Security and Medicare tax: the 7.65% baseline

Social Security and Medicare taxes together make up the bulk of employer payroll tax. For Social Security, you owe 6.2% of each employee's gross wages, but only up to a wage cap. That cap changes every year — in 2024 it was $168,600, meaning you stop calculating Social Security tax once an employee reaches that amount in a calendar year. Medicare has no wage cap: you owe 1.45% on all gross wages, no matter how high.

On top of the standard 1.45% Medicare tax, there is an additional 0.9% Medicare tax that applies to wages over $200,000 per employee per year. You withhold this from the employee's pay, but you also owe a matching 0.9% as the employer. This additional tax does not have a wage cap and applies to all employees whose wages exceed the threshold in that year.

To calculate these for a single pay period, multiply the gross wages by the tax rate. If an employee earns $2,000 in a biweekly paycheck and has not hit the Social Security wage cap for the year, you owe $2,000 × 0.062 = $124 in Social Security tax and $2,000 × 0.0145 = $29 in Medicare tax. Keep a running total of each employee's year-to-date wages so you know when to stop calculating Social Security tax.

Federal unemployment tax (FUTA): 0.6% or 6% depending on state tax

Federal unemployment tax funds the unemployment insurance system. The base rate is 6% of the first $7,000 in annual wages per employee. However, the IRS allows you to claim a credit if you pay state unemployment tax (SUTA) on time and in full. In most states, this credit is 5.4%, which reduces your FUTA rate to 0.6%.

Calculate FUTA only once per employee per year, on the first $7,000 of gross wages. If an employee earns $10,000 in a year, you owe FUTA on only $7,000. Once you have paid FUTA on $7,000 for an employee in a calendar year, you stop calculating it for that employee for the rest of the year. At the 0.6% rate (assuming you get the state credit), $7,000 × 0.006 = $42 per employee per year.

If you do not pay state unemployment tax, or if you pay it late, you lose the credit and owe the full 6%. Some states also have a solvency surcharge or other adjustments that change the credit amount — check with your state's unemployment insurance agency to confirm the exact credit you can claim.

State unemployment insurance tax (SUTA): rates and wage bases vary

Every state except a few (like South Dakota and Wyoming) requires employers to pay state unemployment insurance tax. The rate and wage base are set by your state and often depend on your industry and your history of layoffs. A new business might pay 2.7% in one state and 3.1% in another; an established business with few claims might pay 1.2%, while one with many claims might pay 5% or higher.

The wage base — the maximum amount of wages per employee per year on which you owe SUTA — also varies. Some states use $7,000 (matching the federal cap), while others use $8,000, $9,000, $10,000, or higher. You must contact your state's labor or revenue department to find your rate and wage base. Many states post this information online, and some allow you to look up your account and rate directly.

Calculate SUTA the same way as FUTA: multiply the gross wages (up to the state wage base) by your state rate. If your state rate is 2.5% and the wage base is $8,000, you owe $8,000 × 0.025 = $200 per employee per year. You report and pay SUTA on a schedule set by your state — usually quarterly — using a form specific to that state.

How to organize the calculation: a step-by-step example

Assume you have two employees and a biweekly payroll. Employee A earns $2,500 gross; Employee B earns $1,800 gross. Neither has hit the Social Security wage cap, and this is early in the year so neither has hit the $7,000 FUTA threshold yet. Your state SUTA rate is 2.5% with a $7,000 wage base.

Employee A: Social Security: $2,500 × 0.062 = $155. Medicare: $2,500 × 0.0145 = $36.25. FUTA: $2,500 × 0.006 = $15. SUTA: $2,500 × 0.025 = $62.50. Total employer tax for this employee this pay period: $268.75.

Employee B: Social Security: $1,800 × 0.062 = $111.60. Medicare: $1,800 × 0.0145 = $26.10. FUTA: $1,800 × 0.006 = $10.80. SUTA: $1,800 × 0.025 = $45. Total employer tax for this employee this pay period: $193.50.

Combined payroll: Total employer payroll tax for this pay period is $268.75 + $193.50 = $462.25. You deposit the federal taxes (Social Security, Medicare, and FUTA) using EFTPS or your payroll provider on the IRS deposit schedule. You report and pay SUTA separately to your state, usually quarterly.

When and how to deposit employer payroll taxes

The IRS requires you to deposit federal payroll taxes (Social Security, Medicare, and FUTA) on a schedule based on how much tax you owe. Most small businesses are monthly depositors: you add up all the federal payroll tax you owe for a calendar month and deposit it by the 15th of the following month. Some larger businesses are semiweekly depositors: the deposit schedule depends on which days you pay employees and follows a specific IRS rule.

You must use the Electronic Federal Tax Payment System (EFTPS) or pay through your payroll software provider, which routes the payment to EFTPS. You cannot mail a check. When you deposit, you report the amount of Social Security tax, Medicare tax, and FUTA separately so the IRS can track each one against your quarterly and annual filings.

State unemployment tax has its own deposit schedule, which varies by state. Some states require quarterly deposits; others require monthly or annual deposits. Check your state's labor or revenue department website or your SUTA account for the exact due dates.

Reconciling taxes on quarterly and annual forms

Every quarter, you file Form 941 (Employer's Quarterly Federal Tax Return) with the IRS. This form lists the total wages you paid, the total federal income tax you withheld, the total Social Security and Medicare tax you owe (both employee and employer portions), and the deposits you made. If your deposits match your liability, you owe nothing more. If you deposited too little, you owe the difference; if you deposited too much, you get a credit toward the next quarter.

At the end of the year, you file Form 940 (Employer's Annual Federal Unemployment Tax Return), which reconciles your FUTA liability for the year. You report the total wages subject to FUTA, your FUTA tax at the 0.6% rate (or 6% if you did not pay state tax), and the deposits you made. Again, the form shows whether you owe more or have overpaid.

Mistakes on these forms — wrong wage totals, wrong tax rates, deposits that do not match the form — trigger IRS notices and can result in penalties and interest. If you use payroll software or a payroll service, they usually prepare these forms for you, but you are responsible for reviewing them before filing.

Frequently Asked Questions

Do I owe employer payroll taxes if I have no employees?

No. Employer payroll taxes apply only to wages you pay to employees. If you are self-employed and have no staff, you do not owe employer payroll taxes. You may owe self-employment tax, which is different and calculated on your personal tax return.

What happens if I deposit late or deposit the wrong amount?

The IRS charges a penalty based on how late the deposit is — 2% if one to five days late, 5% if six to 15 days late, 10% if more than 15 days late. You also owe interest on any unpaid tax. If you discover an error, file an amended Form 941 or 940 as soon as possible to correct it and reduce the penalty.

Can I use a payroll service instead of calculating taxes myself?

Yes. Payroll services like ADP, Gusto, and Paychex calculate employer payroll taxes, make deposits, and file forms on your behalf. You pay a fee per employee per pay period, but it removes the risk of calculation errors and missed deadlines. Many small businesses find this worth the cost.

What if an employee works in multiple states?

You owe SUTA in the state where the employee works, not where your business is located. If an employee works in two states in the same year, you may owe SUTA in both states, each with its own rate and wage base. This is complex — consult a payroll professional or contact both states' labor departments for guidance.

Do I owe employer payroll taxes on contractor payments?

No. Contractor payments are not subject to employer payroll taxes. Contractors are responsible for their own self-employment tax. However, the IRS has strict rules about who qualifies as a contractor versus an employee. Misclassifying an employee as a contractor can result in back taxes, penalties, and interest.