Employers pay 15.3% of each employee's wages in federal payroll taxes, split between Social Security and Medicare

The employer's share breaks down into two parts: 12.4% for Social Security and 2.9% for Medicare. These are matched taxes — the employee pays the same percentages from their paycheck, so together they fund the Social Security and Medicare trust funds. An employer with an employee earning $50,000 per year pays $7,650 in federal payroll taxes on that wage alone.

The Social Security portion (12.4%) only applies to wages up to an annual cap. For 2024, that cap is $168,600, meaning employers stop paying the Social Security tax once an employee reaches that wage threshold in a calendar year. The Medicare portion (2.9%) has no wage cap — employers pay it on all wages, no matter how high. Additionally, employers pay an extra 0.9% Medicare tax on wages above $200,000 per employee per year, though this is less common for most businesses.

These are federal taxes only. Most states also impose state payroll taxes, and some cities add local payroll taxes on top. The state and local rates vary widely — some states have no payroll tax at all, while others charge between 0.5% and 6% or more. An employer in New York City, for example, pays both New York State and New York City payroll taxes in addition to the federal amount.

Key Takeaways

  • Federal payroll taxes cost employers 15.3% of wages: 12.4% for Social Security (capped at $168,600 per employee in 2024) and 2.9% for Medicare (no cap).
  • State and local payroll taxes vary by location and can add 0.5% to 6% or more on top of the federal rate.
  • Employers must withhold matching amounts from employee paychecks and remit both the employer and employee portions to the IRS.
  • Self-employed people pay both the employer and employee share (15.3% total for Social Security and Medicare), though they can deduct half of it.
  • Payroll tax obligations are separate from income tax withholding and unemployment insurance, which employers also handle.

How the employer and employee shares work together

When you see 15.3% mentioned, that is the total cost split between employer and employee. The employer writes a check for 7.65% of wages, and the employee's paycheck is reduced by the other 7.65%. Both amounts go to the same federal accounts — the Social Security Trust Fund and the Medicare Trust Fund.

The employee never sees the employer's portion as income. It is a business expense for the employer. From the employee's perspective, their 7.65% comes out of their gross pay before income tax is calculated. This is why your paycheck stub shows both "employee FICA" (the 7.65% you pay) and why your employer's tax filings show the matching 7.65% they paid on your behalf.

The employer is responsible for collecting the employee's share, holding it, and sending both portions to the IRS. If an employer fails to remit these taxes, the IRS can pursue the employer personally for the unpaid amount, even if the business closes or declares bankruptcy. This is called the "trust fund recovery penalty" because the withheld employee taxes are considered held in trust.

The Social Security wage cap and why it matters

The 12.4% Social Security tax only applies to the first $168,600 of wages per employee in 2024. Once an employee reaches that threshold in a calendar year, the employer stops paying the Social Security portion for the rest of that year. The Medicare tax (2.9%) continues with no limit.

This cap resets every January 1st. An employee who earned $168,600 in 2024 and is still employed in 2025 will have the Social Security tax applied again starting January 1st, 2025. The cap itself changes each year based on wage growth — the IRS announces the new cap in October for the following year.

For most employees, this cap has little practical effect because they do not earn that much. But for highly paid employees, executives, or anyone earning over roughly $14,000 per month, the employer's payroll tax burden decreases partway through the year. A CEO earning $500,000 per year costs the employer far less in Social Security tax than a proportional amount would suggest, because the tax stops after the first $168,600.

State and local payroll taxes vary widely by location

Federal payroll taxes are the same everywhere, but state and local taxes are not. Some states have no payroll tax at all — Texas, Florida, Tennessee, and Wyoming are examples. Other states charge between 0.5% and 6% or higher. California, for instance, imposes a state payroll tax that ranges from 1.1% to 1.5% depending on the type of work and the employer's size.

Cities can add their own layer. New York City employers pay a city payroll tax on top of the state rate. Washington, D.C. has a local payroll tax. Some smaller cities also impose payroll taxes. An employer operating in multiple states or cities must track and pay the correct rate for each location where employees work.

Remote work has complicated this. If an employee lives in one state but works for a company in another, the employer may owe payroll taxes in both states, or only in the state where the employee lives — the rules vary. Employers with remote workers should check with a payroll service or tax professional to confirm their obligations in each state where employees are located.

Unemployment insurance and workers' compensation are separate costs

Payroll taxes (Social Security and Medicare) are only part of what employers pay. Unemployment insurance (UI) is a separate employer tax that funds state unemployment benefits. The federal unemployment tax (FUTA) is 6% on the first $7,000 of each employee's wages per year, though employers typically receive a credit that reduces this to 0.6%. States add their own unemployment tax (SUTA), which varies by state and by the employer's industry and claims history.

Workers' compensation insurance is another separate cost. Employers in most states are required to carry workers' compensation insurance, which covers medical expenses and lost wages if an employee is injured on the job. The cost is a percentage of payroll and varies by state, industry, and the employer's safety record. A construction company pays a much higher rate than an office-based business.

Together, payroll taxes, unemployment insurance, and workers' compensation can easily add 20% to 25% or more to an employee's base wage as a total cost to the employer. This is why the "fully loaded" cost of an employee is significantly higher than their salary.

Self-employed people pay both the employer and employee share

If you are self-employed, you pay both sides of the payroll tax yourself. That is 15.3% total for Social Security and Medicare — 12.4% for Social Security (on income up to $168,600) and 2.9% for Medicare (on all income). You calculate this as self-employment tax on Schedule SE of your tax return.

The IRS recognizes that this is a heavier burden than employees face, so it allows you to deduct half of your self-employment tax as a business expense. This reduces your taxable income, which lowers your income tax bill. You still pay the full 15.3%, but half of it reduces your income tax liability.

Self-employed people also have to make quarterly estimated tax payments to the IRS if they expect to owe more than $1,000 in taxes for the year. This is different from employees, who have taxes withheld from each paycheck automatically. Self-employed people must plan ahead and set aside money for taxes throughout the year.

How employers report and pay payroll taxes

Employers report payroll taxes on Form 941 (Employer's Quarterly Federal Tax Return), which is filed four times per year — once for each quarter. The form shows total wages paid, the employee withholdings, the employer's matching share, and the total amount owed to the IRS. Large employers may be required to pay taxes more frequently, sometimes weekly or twice per week, depending on their payroll size.

Employers use a payroll service, accounting software, or a bank to handle the actual payment and filing. The payroll service calculates the correct amounts, withholds from employee paychecks, and sends the employer's share and employee withholdings to the IRS on the employer's behalf. Many small employers use services like ADP, Gusto, or Paychex for this reason — it is easier and less error-prone than handling it manually.

At the end of the year, employers file Form 940 (Employer's Annual Federal Unemployment Tax Return) for unemployment taxes and provide employees with Form W-2 (Wage and Tax Statement), which shows total wages and all taxes withheld. The W-2 is also sent to the IRS so the agency can match it against the employee's tax return.

Frequently Asked Questions

Do employers pay payroll taxes on bonuses and commissions?

Yes. Any compensation paid to an employee — bonuses, commissions, overtime pay, paid time off, and other forms of wages — is subject to payroll taxes. The 15.3% federal rate applies to all of it. This is why bonuses increase an employer's payroll tax cost, not just the employee's take-home pay.

What happens if an employer does not pay payroll taxes?

The IRS treats unpaid payroll taxes as a serious violation. The agency can pursue the employer personally, place liens on business assets, and even pursue criminal charges in cases of willful evasion. Employees can also file a complaint with the Department of Labor. Unpaid payroll taxes are one of the fastest ways for a business to face legal and financial consequences.

Do employers pay payroll taxes on independent contractors?

No. Independent contractors are not employees, so employers do not pay payroll taxes on payments to them. Instead, the contractor is responsible for paying self-employment tax. Employers do report payments to contractors on Form 1099-NEC if the total reaches $600 or more in a year. This is why misclassifying an employee as a contractor is illegal — it shifts the payroll tax burden to the worker.

Can an employer deduct payroll taxes as a business expense?

Yes. The employer's share of payroll taxes (7.65% federal, plus state and local taxes) is a deductible business expense. This reduces the employer's taxable income. The employee's share, which the employer withholds, is not a deduction for the employer because it is the employee's tax liability, not the employer's.

Do payroll taxes change if an employee works part-time?

No. The tax rate stays the same — 15.3% federal — regardless of whether an employee works full-time or part-time. A part-time employee earning $10,000 per year costs the employer $1,530 in federal payroll taxes. The rate does not change based on hours worked, only on total wages paid.