Employer payroll tax is a percentage of what you pay your employees, split between Social Security and Medicare

As an employer, you pay 15.3% in combined payroll tax on each employee's wages, up to an annual cap that changes each year. This breaks into 12.4% for Social Security and 2.9% for Medicare. You pay this tax on top of the wages themselves — it is not deducted from what your employee receives. The Social Security portion stops once an employee hits the annual wage cap (in 2024, that cap is $168,600, but it rises most years). Medicare tax continues on all wages with no cap.

If you have employees, you are required to withhold their portion of payroll tax from their paychecks and send both your portion and theirs to the IRS. This happens through quarterly estimated tax payments or, more commonly, through a payroll service that handles the deposits for you. The timing and method depend on how much total payroll tax you owe — larger employers deposit more frequently.

Self-employed people pay a different rate because they cover both the employer and employee portions themselves. This guide focuses on what you owe as an employer with W-2 employees.

Key Takeaways

  • Employer payroll tax is 15.3% total: 12.4% for Social Security (capped at $168,600 in annual wages per employee in 2024) and 2.9% for Medicare (no cap).
  • You pay this on top of employee wages, and you must also withhold and remit the employee's portion (7.65%) from their paychecks.
  • The Social Security wage cap increases most years, so the maximum employer tax per employee changes annually.
  • Deposit frequency depends on your total payroll tax liability — most small employers deposit quarterly, while larger ones deposit more often.
  • You report and reconcile all payroll taxes on Form 941 (quarterly) or Form 944 (annual, if you owe less than $1,000 per quarter).

How the 15.3% breaks down between Social Security and Medicare

The 15.3% employer rate consists of two separate taxes that fund different programs. Social Security tax is 12.4%, but only on wages up to the annual cap. In 2024, that cap is $168,600 per employee. Once an employee's wages hit that amount in a calendar year, you stop paying Social Security tax on their additional earnings for the rest of that year. Medicare tax is 2.9% with no wage cap — you pay it on every dollar an employee earns, all year long.

There is also an additional Medicare tax of 0.9% that applies to high-wage employees, but as an employer you do not pay that directly. You withhold it from the employee's paycheck if their wages exceed certain thresholds ($200,000 for single filers, $250,000 for married filing jointly). The employee's portion of regular Medicare tax is 1.45%, so combined with the additional tax it can reach 2.35% on high earners.

For most small businesses, the 15.3% rate is what matters. You calculate it on gross wages before any deductions for health insurance, retirement contributions, or other benefits.

The wage cap and how it affects your tax bill

The Social Security wage cap means your employer tax bill per employee is not unlimited. In 2024, once an employee earns $168,600, you stop owing the 12.4% Social Security tax on their wages for that year. The cap resets on January 1 each year. The Social Security Administration announces the new cap in October of the prior year, so you can plan ahead.

This matters most if you have high-earning employees or multiple employees. If you have one employee earning $200,000 per year, you pay 12.4% Social Security tax only on the first $168,600 of their wages. On the remaining $31,400, you pay only the 2.9% Medicare tax. If you have ten employees each earning $100,000, you pay the full 12.4% on all of them because none hit the cap.

The cap has risen most years since 1975. It went from $160,200 in 2023 to $168,600 in 2024. If you use payroll software, it usually updates the cap automatically each January, but it is worth checking your settings in early January to confirm.

When and how you deposit employer payroll taxes

You do not pay employer payroll tax once a year. Instead, you deposit it on a schedule set by the IRS based on how much you owe. The IRS uses a lookback period to determine your deposit frequency. For 2024 deposits, the IRS looks at your total payroll tax liability from July 2022 through June 2023. If that total was less than $50,000, you deposit quarterly. If it was $50,000 or more, you deposit semi-weekly (twice per week on specific days tied to when you pay employees).

Most small employers with one to five employees deposit quarterly. Quarterly deposits are due on April 30 (for January–March), July 31 (for April–June), October 31 (for July–September), and January 31 of the following year (for October–December). You make deposits through the IRS's Electronic Federal Tax Payment System (EFTPS) or through your payroll provider, which can deposit on your behalf.

If you use a payroll service like ADP, Gusto, or Paychex, they typically handle deposits automatically. You do not calculate the amount yourself — the software tracks your liability and deposits when due. If you process payroll manually, you must calculate the total and deposit yourself or face penalties and interest.

Reporting payroll taxes on your quarterly or annual return

Every quarter (or annually, if you may have access to), you file a payroll tax return that reconciles what you deposited with what you actually owed. Most employers file Form 941 quarterly. This form reports total wages paid, total employee income tax withheld, total Social Security and Medicare tax (both employer and employee portions), and any adjustments or credits.

If your total payroll tax liability is less than $1,000 per quarter, you may be able to file Form 944 annually instead. This is less common but available to very small employers. You still deposit quarterly if required by the lookback rule, but you file one return at year-end instead of four.

Form 941 is due the last day of the month following the end of the quarter. For example, the Q1 return (January–March) is due April 30. If you file electronically, you get an extra 10 days. If you discover an error on a past return, you file Form 941-X to correct it.

State and local payroll taxes you may also owe

Federal payroll tax is only part of the picture. Most states also impose payroll tax on employers, and some cities do as well. State rates and rules vary widely. Some states have no income tax at all (like Texas, Florida, and Nevada), so you owe only federal payroll tax. Others, like California and New York, impose state income tax withholding on top of federal.

You must research your state's requirements separately because they do not follow the federal 15.3% structure. Some states tax only a percentage of wages; others use a different calculation. You also may owe state unemployment insurance (SUTA) tax, which funds state unemployment benefits. SUTA rates vary by state and by industry, and they change based on your company's history of layoffs.

If you have employees in multiple states, you owe payroll tax in each state where they work. This is why many employers use a payroll service that handles both federal and state compliance — trying to track different rates and important date across states is error-prone.

Common mistakes employers make with payroll tax

The most common mistake is misclassifying workers as independent contractors when they should be W-2 employees. If the IRS reclassifies a contractor, you owe back payroll taxes plus penalties and interest. The IRS uses a three-part test: does the company control how the work is done, is the work part of the company's core business, and is the relationship ongoing. If the answer to all three is yes, the person is likely an employee.

Another frequent error is failing to deposit on time. The IRS imposes penalties of 2% to 15% of the unpaid tax depending on how late the deposit is. Even a few days late triggers a penalty. If you use a payroll service, this is less likely because the service deposits automatically, but if you deposit manually, set calendar reminders.

A third mistake is not updating the wage cap in January. If you use payroll software, check that the Social Security cap has been updated. If you calculate payroll by hand, look up the new cap on the Social Security Administration website each January. Continuing to withhold Social Security tax after an employee hits the cap creates a reconciliation headache on Form 941.

Frequently Asked Questions

Do I pay payroll tax on tips my employees receive?

Yes, you pay employer payroll tax on reported tips. Employees must report tips to you, and you withhold and pay payroll tax on the total (wages plus tips). Some employers are confused about this because tips are not wages the employer paid, but the IRS treats them as taxable compensation for payroll purposes.

What if I have an employee who works part-time or seasonally?

You pay the same 15.3% rate on their wages regardless of hours or season. The rate does not change based on employment type. You still deposit on the same schedule and file the same forms. The only difference is the total amount of tax you owe, which is lower because their wages are lower.

Can I deduct payroll tax as a business expense?

Yes, employer payroll tax is a deductible business expense. You report it on your business tax return (Schedule C for sole proprietors, Form 1120 for corporations, etc.). This is different from employee income tax withholding, which you cannot deduct because it belongs to the employee, not your business.

What happens if I underpay payroll tax during the year?

When you file Form 941, the IRS compares what you deposited to what you owed. If you underpaid, you owe the difference plus interest and possibly penalties. The penalty depends on how late the payment is. If you discover the error before the IRS does, you can file Form 941-X to correct it and may reduce or avoid penalties.

Do I owe payroll tax on bonuses or severance?

Yes, both bonuses and severance are subject to the full 15.3% payroll tax. They are treated as wages. Bonuses are straightforward — you withhold and pay tax when you pay the bonus. Severance is also taxable, though some employers mistakenly think it is not. You withhold income tax and payroll tax on severance just as you would on regular wages.