Employer payroll tax is a percentage of wages you pay to the federal government and your state

Employer payroll tax is money your business sends to the IRS and your state based on what you pay your employees. It is separate from income tax withholding — it is a tax on the employer, not deducted from paychecks. The federal rate is 15.3 percent of employee wages, split between Social Security (12.4 percent) and Medicare (2.9 percent). Your state may add its own payroll tax on top of that, ranging from zero to several percent depending on where you operate.

You pay this tax on every dollar of wages up to a cap for Social Security. For 2024, that cap is $168,600 per employee — meaning once an employee earns that much in a year, you stop paying the Social Security portion on their additional wages. Medicare has no cap, so you pay 2.9 percent on all wages, plus an additional 0.9 percent Medicare tax on wages over $200,000 per employee per year.

The amount you owe depends on your payroll size and your state. A business with one employee earning $40,000 a year owes roughly $6,120 in federal employer payroll tax annually. A business with ten employees at the same wage owes roughly $61,200. State taxes vary widely — some states have no payroll tax at all, while others charge between 0.5 and 5.4 percent.

Key Takeaways

  • Federal employer payroll tax is 15.3 percent of employee wages: 12.4 percent for Social Security (capped at $168,600 per employee in 2024) and 2.9 percent for Medicare with no cap.
  • You pay this tax separately from income tax withholding — it comes from your business funds, not from employee paychecks.
  • Most states add their own payroll tax on top of the federal rate, though a few states have no payroll tax.
  • The Social Security portion stops once each employee reaches the annual wage cap, but Medicare continues on all wages.

How the federal employer payroll tax breaks down

The 15.3 percent federal rate has two parts. The Social Security portion is 12.4 percent of wages, but only up to the annual wage base. In 2024, that base is $168,600 per employee. Once an employee earns $168,600 in a calendar year, you stop paying the 12.4 percent on their remaining wages for that year. This resets on January 1.

The Medicare portion is 2.9 percent of all wages with no limit. If an employee earns $200,000, you pay 2.9 percent on the full $200,000. Additionally, if any employee's wages exceed $200,000 in a year, you owe an extra 0.9 percent Medicare tax on the amount over $200,000. This additional tax applies per employee, not per business.

Example: You have one employee earning $180,000 in 2024. You pay 12.4 percent Social Security tax only on $168,600 (the cap), which is $20,905.44. You pay 2.9 percent Medicare on the full $180,000, which is $5,220. You also pay the additional 0.9 percent Medicare tax on the $11,400 over $200,000 — wait, this employee is under $200,000, so no additional tax. Your total federal employer payroll tax for this employee is $26,125.44.

State and local payroll taxes vary by location

Most states impose their own payroll tax on employers, but the rate and rules differ. Some states tax a percentage of total payroll. Others tax only certain types of wages or have different rates for different industries. A few states — including Nevada, South Dakota, Texas, Washington, and Wyoming — have no state payroll tax at all.

States that do tax payroll typically charge between 0.5 and 5.4 percent, though the rate often depends on your industry and the employee's role. California, for example, taxes employers at rates ranging from 0.1 to 5.4 percent depending on the type of worker and the size of your payroll. New York charges between 0.5 and 6.5 percent. You need to check your specific state's rules or contact your state's labor department to know your exact rate.

Some cities and counties also impose payroll taxes on top of state taxes. San Francisco, for instance, has a local payroll tax. These are less common than state taxes but can add another 0.1 to 1.5 percent depending on where you operate. If you have employees in multiple states or cities, you may owe different rates in each location.

When you owe employer payroll tax

You owe employer payroll tax as soon as you have employees on your payroll. There is no minimum payroll size or revenue threshold — even a one-person business with one part-time employee owes it. The tax is due on the same schedule as income tax withholding: typically quarterly, though some businesses with larger payrolls may owe more frequently.

You calculate and pay employer payroll tax through the IRS's Electronic Federal Tax Payment System (EFTPS) or through a payroll processor. Most payroll software — such as QuickBooks Payroll, ADP, or Gusto — calculates both employee withholding and employer payroll tax automatically and can file and pay on your behalf. If you use a payroll processor, they usually handle the payment schedule and filing.

If you miss a payment, the IRS charges penalties and interest. The penalty for late payment is typically 0.5 percent per month of the unpaid amount. Interest accrues daily. If you cannot pay in full, you can set up a payment plan with the IRS, though interest and penalties continue to accrue until the balance is paid.

How employer payroll tax differs from employee withholding

Many business owners confuse employer payroll tax with income tax withholding, but they are two separate obligations. Income tax withholding is money you deduct from employee paychecks and send to the IRS on their behalf. The employee never sees that money — it goes directly to the government. Employer payroll tax is money your business pays out of its own funds, based on what you pay employees.

On a $50,000 annual salary, an employee might have $6,000 withheld for federal income tax (depending on their W-4). That $6,000 comes from their paycheck. At the same time, you as the employer owe 15.3 percent of that $50,000 in employer payroll tax — roughly $7,650 — which comes from your business account. The employee pays income tax withholding; you pay employer payroll tax. Both go to the government, but from different sources.

You also withhold Social Security and Medicare tax from employee paychecks (6.2 percent and 1.45 percent respectively). You then match those amounts with employer payroll tax. So the employee pays 6.2 percent Social Security, and you pay another 6.2 percent. The employee pays 1.45 percent Medicare, and you pay another 1.45 percent. This matching is what makes up the 15.3 percent employer rate.

Deducting employer payroll tax on your business taxes

Employer payroll tax is a business expense and is deductible on your business tax return. You report it on Schedule C (for sole proprietors and partnerships), Schedule S-Corp (for S corporations), or your corporate tax return, depending on your business structure. The deduction reduces your taxable business income, which lowers the income tax you owe.

You do not need to do anything special to claim this deduction — if you paid the tax, you can deduct it. Your payroll processor or accountant will typically include it in your year-end tax documents. Keep records of all payroll tax payments (your EFTPS receipts or payroll processor statements) in case the IRS asks for proof.

Frequently Asked Questions

Do I owe employer payroll tax if I am a sole proprietor with no employees?

No. Employer payroll tax applies only when you have employees on your payroll. If you are self-employed with no employees, you owe self-employment tax instead, which is calculated on your net business income on Schedule SE. Self-employment tax covers both the employee and employer portions of Social Security and Medicare.

What happens if my employee works in a different state than my business?

You owe payroll tax in the state where the employee works, not where your business is located. If you have an employee in California and your business is in Texas, you owe California state payroll tax on that employee's wages. If you have employees in multiple states, you may owe different rates in each state. Your payroll processor can usually handle multi-state withholding.

Can I reduce my employer payroll tax?

No, the rate is set by law and applies to all employers. However, you can reduce the total amount you owe by paying lower wages, which is not a practical strategy. Some businesses use independent contractors instead of employees to avoid payroll tax, but contractors must meet specific IRS criteria or you risk penalties. Consult a tax professional before classifying workers as contractors.

When do I file and pay employer payroll tax?

Federal employer payroll tax is due quarterly, typically on the 15th of the month following the end of each quarter (April 15, July 15, October 15, and January 15). State payroll taxes follow your state's schedule, which may be quarterly, monthly, or on a different cycle. Your payroll processor will remind you of due dates and can file and pay automatically.

Is employer payroll tax the same as unemployment tax?

No, they are separate. Employer payroll tax funds Social Security and Medicare. Unemployment tax (FUTA and SUTA) funds unemployment benefits and is calculated differently. You owe both if you have employees. FUTA is 6 percent of the first $7,000 of each employee's wages per year (though you may receive a credit if you pay state unemployment tax). State unemployment tax rates vary by state and industry.