Employers pay the full cost of federal unemployment insurance and workers' compensation

Two major payroll taxes fall entirely on the employer: Federal Unemployment Tax Act (FUTA) and workers' compensation insurance. The employee pays nothing toward either one, and neither appears on a paycheck stub as a deduction. The employer remits FUTA to the federal government quarterly, and workers' compensation premiums go to a state fund or private insurer depending on where the business operates.

A third tax, employer-side Social Security and Medicare, is also paid only by the employer. While employees see Social Security and Medicare deductions on their paychecks, the employer matches those amounts dollar-for-dollar and pays them separately to the federal government. This employer match is a payroll tax the employee never sees or pays.

Key Takeaways

  • FUTA (federal unemployment tax) is paid entirely by employers at a rate of 0.6% on the first $7,000 of each employee's annual wages, with no employee contribution.
  • Workers' compensation insurance is an employer-only cost that varies by state and industry, covering medical expenses and lost wages if an employee is injured on the job.
  • Employers match the employee's Social Security and Medicare contributions dollar-for-dollar, meaning the employer pays 7.65% in addition to what the employee pays.
  • These employer-only taxes do not reduce an employee's take-home pay and are business expenses the employer deducts on tax returns.

Federal Unemployment Tax (FUTA) — how it works

FUTA funds the unemployment insurance system that pays workers who lose their jobs through no fault of their own. The employer pays 6% on the first $7,000 of each employee's annual wages, but a credit of up to 5.4% is available if the employer pays state unemployment tax (SUTA), bringing the effective federal rate down to 0.6% in most cases. This calculation happens automatically when the employer files quarterly FUTA returns with the IRS.

The $7,000 wage base resets each calendar year, so an employer calculates FUTA on the first $7,000 each employee earns from January through December. Once an employee's wages hit $7,000 in a year, no more FUTA is owed on that person's earnings for the rest of that year. An employee who changes jobs mid-year may have FUTA paid on up to $7,000 by each employer, but the employee still receives no deduction and pays nothing.

Workers' compensation insurance — employer responsibility

Workers' compensation is a form of insurance that employers must carry in most states. It covers medical treatment, rehabilitation, and a portion of lost wages if an employee is injured or becomes ill because of work. The employee pays nothing toward this insurance; the employer either pays premiums to a private insurance company or contributes to a state workers' compensation fund, depending on state law.

The cost varies widely by state and by the type of work. A construction company pays a much higher rate than an office-based business because the injury risk is higher. Employers in states with state-run funds (like California, Ohio, and Texas) pay into those funds; employers in other states buy coverage from private insurers. In either case, the cost is a business expense borne entirely by the employer.

Employer Social Security and Medicare match

When an employee sees Social Security and Medicare deductions on a paycheck, the employer is simultaneously paying an equal amount to the federal government. The employee's rate is 6.2% for Social Security (on wages up to a cap that changes yearly) and 1.45% for Medicare (on all wages). The employer pays exactly the same percentages on the employee's behalf, for a total employer contribution of 7.65% per employee.

This employer match is a payroll tax separate from what the employee pays. It does not appear on the employee's paycheck because the employee is not paying it — the employer sends it directly to the IRS along with the employee's withholdings. For tax purposes, the employer deducts this as a business expense, reducing the company's taxable income.

How these taxes differ from employee-shared taxes

Some payroll taxes are split between employer and employee. Social Security and Medicare are the main examples: both sides pay, and both amounts appear in payroll records. State unemployment insurance (SUTA) is also typically split, though the employee's portion (if any) varies by state — some states charge employees nothing, while others deduct a small percentage from paychecks.

Income tax withholding is different still: it is not a payroll tax the employer pays, but rather a withholding the employer deducts from the employee's paycheck and remits to federal and state governments on the employee's behalf. The employer-only taxes — FUTA, workers' compensation, and the employer's Social Security and Medicare match — are genuine business costs that do not come out of employee wages.

Why employers pay these taxes alone

FUTA and workers' compensation exist to protect workers who lose income due to job loss or workplace injury. The policy choice to make employers bear the full cost reflects the idea that employers benefit from a stable workforce and should fund the safety net that keeps workers afloat during hardship. The employer match for Social Security and Medicare follows the same logic: both employer and employee contribute to the worker's future retirement and health security.

From a practical standpoint, these employer-only taxes reduce the amount of take-home pay that must be withheld from paychecks. An employee's gross pay is not reduced by FUTA or workers' compensation, so the employee receives the full negotiated wage. The employer's cost is separate and is factored into the total cost of employment when a business budgets for payroll.

Frequently Asked Questions

Can an employer deduct these taxes from an employee's paycheck?

No. FUTA, workers' compensation premiums, and the employer's Social Security and Medicare match are employer-only costs and cannot be deducted from an employee's wages. Doing so would violate wage and hour laws. The employee's take-home pay is reduced only by taxes and deductions the employee is legally required to pay, such as income tax withholding and the employee's own Social Security and Medicare contributions.

What happens if an employer does not pay FUTA or workers' compensation?

Failure to pay FUTA results in penalties, interest, and potential criminal charges. Workers' compensation requirements vary by state, but most states impose significant fines and may suspend a business license. An uninsured employer who has an employee injury may face lawsuits and be personally liable for medical and wage-loss costs. Both are legal obligations, not optional expenses.

Does the FUTA wage base change every year?

The $7,000 wage base for FUTA has remained the same since 1983 and does not adjust for inflation. However, some states have higher SUTA wage bases, which can affect the total unemployment tax an employer pays. Check your state's unemployment insurance agency for the current SUTA wage base in your state.

Are there any employers exempt from paying FUTA?

Most employers must pay FUTA, but certain nonprofits, government agencies, and railroads have different rules. A nonprofit organization with a 501(c)(3) status may be exempt from FUTA if it meets specific criteria, though it may still owe SUTA. Check with the IRS or your state unemployment insurance office if you believe your business qualifies for an exemption.