What employer payroll taxes are and where the money goes

Employer payroll taxes are taxes your employer pays to the federal and state governments based on how much they pay you in wages. Unlike income tax withheld from your paycheck, employer payroll taxes come directly from the employer's budget — you do not see them deducted from your pay, but they reduce what your employer spends on labor costs.

The two main employer payroll taxes are Social Security tax (6.2% of your wages) and Medicare tax (1.45% of your wages). Your employer pays these amounts on top of your salary. These are separate from the Social Security and Medicare taxes withheld from your own paycheck — you and your employer each pay the same rate, so the total going to these programs is double what appears on your pay stub.

Employer payroll taxes fund specific government programs. Social Security tax money goes into the Social Security trust fund, which pays retirement benefits, survivor benefits, and disability benefits. Medicare tax money goes into the Medicare trust fund, which pays for hospital insurance (Part A) and some preventive care. States also collect unemployment insurance tax from employers, which funds jobless benefits when workers are laid off or let go.

Key Takeaways

  • Employers pay 6.2% Social Security tax and 1.45% Medicare tax on your wages, separate from what is withheld from your paycheck.
  • These employer taxes fund Social Security retirement and disability benefits, Medicare hospital insurance, and state unemployment programs.
  • Employers must report and send these taxes to the IRS and state agencies on a set schedule, usually quarterly or monthly.
  • Self-employed people pay both the employer and employee share of Social Security and Medicare taxes, totaling 15.3%.
  • Employer payroll taxes are a business expense and reduce the amount of profit a company reports to tax authorities.

How much employers pay and who collects it

The federal employer payroll tax rate is fixed by law. For Social Security, employers pay 6.2% on wages up to a cap — in 2024 that cap is $168,600, meaning an employer pays no Social Security tax on earnings above that amount. For Medicare, employers pay 1.45% on all wages with no cap. There is also an additional 0.9% Medicare tax on high earners, but that is typically withheld from the employee's paycheck rather than paid by the employer.

The Internal Revenue Service (IRS) collects federal employer payroll taxes. Employers report these taxes on Form 941 (Employer's Quarterly Federal Tax Return) and send the money to the IRS on a schedule that depends on how much tax they owe — some large employers pay weekly, while smaller ones may pay monthly or quarterly. States collect unemployment insurance tax separately, and the rate varies by state and by industry. A construction company might pay a different rate than a retail store in the same state.

Employers also handle the paperwork. They must track each employee's wages, calculate the correct tax amounts, file the required forms, and keep records for at least four years. If an employer fails to pay or report these taxes, the IRS can impose penalties, interest, and in serious cases, criminal charges.

Why employers pay these taxes and what happens to the money

Employer payroll taxes exist because Social Security and Medicare are funded through a payroll tax system, not general income tax revenue. When you retire, become disabled, or lose a job, these programs pay you benefits based partly on how much you and your employers paid in taxes during your working years. The employer contribution is meant to reflect the employer's share of funding the social insurance system that protects workers.

The money collected goes into separate trust funds managed by the Social Security Administration and the Centers for Medicare and Medicaid Services. For Social Security, the trust fund pays out retirement benefits to people 62 and older, survivor benefits to families of deceased workers, and disability benefits to workers under 65 who cannot work. For Medicare, the trust fund pays hospital bills, doctor visits, and some preventive services for people 65 and older and some younger people with disabilities.

Unemployment insurance taxes work differently. The money stays at the state level and funds the state's unemployment insurance program. When a worker is laid off or fired without cause, they can file for unemployment benefits, which come from this fund. The employer's tax rate may go up or down based on how many of their former employees have drawn benefits — employers with high turnover pay higher rates.

The difference between employer taxes and employee taxes

You pay Social Security and Medicare taxes too, deducted from your paycheck. The employee rate is the same as the employer rate: 6.2% for Social Security and 1.45% for Medicare. This means the total going to these programs is 12.4% for Social Security and 2.9% for Medicare — half from you, half from your employer. Your employer must withhold your share and send it to the IRS along with their own share.

The key difference is who bears the cost. When your employer pays their share, it comes out of the money they budgeted for your compensation. When you pay your share, it comes out of your take-home pay. Over a year, if you earn $50,000, you pay $3,100 in Social Security tax and $725 in Medicare tax. Your employer also pays $3,100 and $725. The total contribution to these programs is $6,200 for Social Security and $1,450 for Medicare.

Self-employed people pay both shares. If you are a freelancer or own a business, you pay the full 15.3% combined rate (12.4% Social Security plus 2.9% Medicare) on your net business income. You can deduct half of this as a business expense on your tax return, but you still pay the full amount to the IRS.

How employer payroll taxes affect your benefits later

The amount your employer pays in taxes on your behalf does not directly increase your Social Security or Medicare benefits. Instead, your benefits are based on your earnings record — the wages you earned and reported to Social Security. Your employer reports your wages to Social Security when they file payroll taxes, so the employer's tax payment is proof that you earned that income and are building toward future benefits.

For Social Security retirement benefits, the program looks at your 35 highest-earning years and calculates a monthly benefit. The more you earned (and the more your employer paid taxes on), the higher your benefit will be, up to a maximum. For Medicare, you become may be able to access at 65 if you or your spouse paid Medicare taxes for at least 10 years (40 quarters). The employer's tax contribution counts toward this requirement.

For unemployment benefits, the connection is more direct. Your former employer's unemployment insurance tax funded the state program that pays you benefits if you are laid off. The amount you receive depends on your state's formula and your recent earnings, not on how much tax your employer paid.

What happens if an employer does not pay payroll taxes

If an employer withholds payroll taxes from employee paychecks but does not send the money to the IRS, this is considered theft of government funds. The IRS treats this as a serious violation. The employer can face criminal prosecution, substantial penalties, and interest charges. Employees are not responsible for the employer's failure to pay, but they may not receive credit toward their Social Security or Medicare benefits if the taxes were never reported.

If an employer goes out of business owing back payroll taxes, the IRS can pursue the business owner personally, especially if the owner is a sole proprietor or partner. The IRS can also go after corporate officers and owners who knowingly allowed the company to fail to pay. In some cases, the IRS will place a lien on the owner's personal assets.

Employees who suspect their employer is not paying payroll taxes can report this to the IRS using Form 13909 (Information Referral). The IRS investigates and can audit the employer's records. If you are concerned about your own benefits, you can check your Social Security earnings record online at ssa.gov to see if your wages were reported correctly.

Frequently Asked Questions

Do I pay employer payroll taxes if I am self-employed?

No, you do not have an employer, so there is no employer to pay the employer share. Instead, you pay both the employer and employee share yourself, totaling 15.3% for Social Security and Medicare combined. This is called self-employment tax and is reported on Schedule SE of your tax return.

Can an employer deduct payroll taxes as a business expense?

Yes. Employer payroll taxes are a business expense and reduce the company's taxable profit. If a company pays $100,000 in wages and $7,650 in employer payroll taxes, the total labor cost is $107,650, and the payroll taxes lower the company's income tax bill.

What if my employer withholds payroll taxes but does not report them to Social Security?

Contact the IRS at 1-800-829-1040 or file Form 13909 to report suspected non-payment. You can also check your Social Security earnings record at ssa.gov to see if your wages were reported. If they were not, contact Social Security directly to correct your record.

Do payroll taxes change if I get a raise or change jobs?

The tax rate stays the same, but the amount of tax paid changes based on your new wage. If you earn more, your employer pays more in payroll taxes. If you change jobs mid-year, each employer pays taxes only on the wages they pay you, and the Social Security tax cap applies to your total earnings across all jobs.

Why do I pay Social Security tax if I might not need Social Security when I retire?

Social Security is a mandatory insurance program, not a savings account. You pay in during your working years, and the program pays benefits to you, your family, or your survivors when you retire, become disabled, or die. Even if you do not collect retirement benefits, your family may receive survivor benefits, and you build protection against disability.