Employer payroll tax rates are set by federal law and vary by program

Employers pay 6.2% for Social Security and 1.45% for Medicare on each employee's wages, up to an annual earnings cap for Social Security. These are the two main federal payroll taxes. Employers also pay federal unemployment insurance (FUTA) at 0.6% on the first $7,000 of each employee's annual wages. Most states add their own unemployment insurance tax on top of the federal rate, ranging from roughly 0.5% to 5.4% depending on the state and the employer's history of layoffs.

The total employer payroll tax burden is typically 7.65% for Social Security and Medicare combined, plus state and federal unemployment taxes. This means an employer paying an employee $50,000 per year owes roughly $3,825 in Social Security and Medicare taxes alone, before any state unemployment tax is added.

Key Takeaways

  • Employers pay 6.2% for Social Security and 1.45% for Medicare on employee wages, with the Social Security rate capped at $168,600 of annual earnings per employee in 2024.
  • Federal unemployment insurance (FUTA) costs employers 0.6% on the first $7,000 of each employee's wages per year, though most employers can claim a credit that reduces this to 0.6%.
  • State unemployment insurance rates vary by state and by employer, ranging from under 1% to over 5% depending on the state's formula and the employer's record of employee separations.
  • Employers must withhold matching amounts from employee paychecks for Social Security and Medicare, then remit both the employee and employer portions to the IRS.
  • Payroll tax rates and wage caps change annually, so employers should check the IRS website or their payroll provider each January for updated figures.

How the Social Security and Medicare tax rates work

The Social Security tax is 6.2% of wages, but only up to a maximum annual earnings amount. In 2024, that cap is $168,600 per employee. Once an employee reaches that earnings threshold in a calendar year, the employer stops withholding and paying the Social Security portion for the rest of that year. This means an employee earning $200,000 per year will only have Social Security tax withheld on the first $168,600.

The Medicare tax is 1.45% of all wages with no annual cap. Unlike Social Security, Medicare tax applies to every dollar an employee earns. Additionally, there is an extra 0.9% Medicare tax on wages over $200,000 per year for single filers (or $250,000 for married filing jointly), but only the employee pays this extra portion — the employer does not.

Both the Social Security and Medicare rates are matched: the employer pays the same percentage as the employee. The employee's portion is withheld from their paycheck, and the employer's portion is a separate cost to the business. The employer must remit both portions to the IRS, usually monthly or semi-weekly depending on the size of the payroll.

Federal unemployment insurance (FUTA) and how it is calculated

Federal unemployment insurance, or FUTA, is 6% of the first $7,000 of each employee's wages per calendar year. However, most employers receive a credit of up to 5.4% if they pay their state unemployment insurance tax on time, which brings the effective federal rate down to 0.6%. This credit exists because the federal program is designed to work alongside state programs, not to duplicate them.

FUTA is paid only by the employer — employees do not have this amount withheld from their paychecks. An employer with 10 employees earning $40,000 each would owe roughly $420 in federal unemployment tax per year (0.6% × $7,000 × 10 employees), assuming they claim the standard state credit.

The $7,000 wage base resets on January 1 each year. If an employee is hired mid-year, the employer only pays FUTA on wages earned from the hire date forward, up to $7,000 in that calendar year.

State unemployment insurance taxes vary widely by location

Every state except Wyoming, South Dakota, and Nevada has a state unemployment insurance (SUI) program. Rates vary significantly by state and are usually based on a formula that includes the employer's history of layoffs and claims. A new employer typically pays a standard rate set by the state, often between 2% and 3%, while an established employer with few layoffs might pay as little as 0.5% or as much as 5.4% or higher.

Some states use a "merit rating" or "experience rating" system, meaning employers with fewer unemployment claims pay lower rates. Other states use a flat rate for all employers. A few states, including New Jersey, Pennsylvania, and Illinois, require employees to contribute to the state unemployment fund as well, so the employer's cost is only part of the total.

State unemployment tax is calculated on a wage base that varies by state. Most states use a $7,000 to $15,000 annual wage base per employee, though some states have higher or lower limits. An employer in a high-tax state with a $15,000 wage base and a 3% rate would owe $450 per employee per year, while an employer in a low-tax state with a $7,000 base and a 0.5% rate would owe $35 per employee per year.

Calculating total payroll tax for an example employee

Consider an employer in California with an employee earning $60,000 per year. The employer's payroll tax costs are:

  • Social Security: 6.2% × $60,000 = $3,720
  • Medicare: 1.45% × $60,000 = $870
  • Federal unemployment (FUTA): 0.6% × $7,000 = $42
  • California state unemployment: varies, but roughly 2% to 3% × $7,000 = $140 to $210

The total employer payroll tax for this employee is approximately $4,772 to $4,842 per year, or about 8% of gross wages. This is in addition to any other payroll costs like workers' compensation insurance, which is required in most states and varies by industry and claims history.

If the same employee earned $200,000 per year, the Social Security tax would still cap at $168,600, so the employer would owe $10,453.20 for Social Security and Medicare combined, plus the same unemployment taxes. The effective payroll tax rate drops as wages increase because the Social Security cap means higher earners do not incur proportionally higher Social Security costs.

When payroll taxes are due and how to report them

Employers must deposit payroll taxes on a schedule determined by the IRS based on the size of the payroll. Most employers deposit federal income tax withholding, Social Security, and Medicare taxes either semi-weekly or monthly using the Electronic Federal Tax Payment System (EFTPS) or through their payroll provider. The deposit schedule is based on how much tax the employer reported in a lookback period, usually the prior four quarters.

Employers report all payroll taxes quarterly on Form 941 (Employer's Quarterly Federal Tax Return) and annually on Form 940 (Employer's Annual Federal Unemployment Tax Return). State unemployment taxes are reported separately to each state, usually quarterly, though the schedule varies by state.

Failure to deposit payroll taxes on time results in penalties and interest. The IRS charges a failure-to-deposit penalty ranging from 2% to 15% of the unpaid amount, depending on how late the deposit is. Payroll tax debt cannot be discharged in bankruptcy, so it is one of the most serious tax obligations a business can have.

Payroll tax rates and wage bases change annually

The Social Security wage base increases each year based on changes in average wages. In 2023, it was $160,200; in 2024, it rose to $168,600. The IRS announces the new wage base in October of the prior year, giving employers time to update their payroll systems.

Medicare tax rates have remained stable at 1.45% for many years, but the extra 0.9% Medicare tax threshold is adjusted annually for inflation. FUTA rates and wage bases are set by federal law and do not change year to year, but state unemployment rates and wage bases are set by each state and may change.

Employers should check the IRS website (irs.gov) or their payroll provider each January to confirm the current wage bases and rates. Using outdated figures can result in under-withholding, which creates a liability at tax time.

Frequently Asked Questions

Do employers pay payroll taxes on tips?

Employers pay Social Security and Medicare taxes on reported tips, but not on cash tips that employees do not report. Employers do not pay federal or state unemployment taxes on tips. If an employee reports tips to the employer, those tips count toward the Social Security wage base cap.

What if an employee works for multiple employers in the same year?

Each employer withholds and pays Social Security tax independently, so an employee could have Social Security tax withheld by two employers on wages that together exceed the annual cap. The employee can claim a credit for the overpayment when filing their tax return, but the employer has no obligation to coordinate with other employers.

Are there any payroll taxes that do not explore to certain types of workers?

Certain workers, such as some religious group members, some government employees, and some nonresident aliens, may be exempt from Social Security and Medicare taxes under specific conditions. Independent contractors do not have payroll taxes withheld by the hiring business; they pay self-employment tax instead. Employers should verify the employment status and any exemptions before calculating payroll taxes.

What happens if an employer does not pay payroll taxes?

Unpaid payroll taxes accrue penalties and interest, and the IRS can place a lien on the business's assets or pursue the business owner personally. Payroll tax debt is one of the few tax debts that can be pursued against business owners individually, even if the business is a corporation or LLC.