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

An employer's share of payroll tax is a fixed percentage of what you pay your employees. For Social Security, employers contribute 6.2% of each employee's gross wages up to a yearly cap (the cap changes annually — it was $168,600 in 2024). For Medicare, employers contribute 1.45% of all wages with no cap. Together, that's 15.3% of payroll going to federal payroll tax before state and local taxes are added.

This is separate from what the employer withholds from the employee's paycheck. When you earn $1,000, your employer withholds 7.65% (your half of Social Security and Medicare) from your pay and also sends 7.65% from the company's own funds to the IRS. The employee never sees the employer's portion — it comes directly from the business.

Employers also pay state unemployment insurance (SUTA) and federal unemployment insurance (FUTA). FUTA is a flat 6% of the first $7,000 of each employee's annual wages, though most employers receive a credit that reduces this to 0.6%. SUTA rates vary by state and by industry, ranging from less than 1% to over 5% depending on the state's fund balance and the employer's layoff history.

Key Takeaways

  • Employers pay 6.2% for Social Security (capped at $168,600 of annual wages per employee in 2024) and 1.45% for Medicare with no cap.
  • The Social Security wage cap increases each year based on average wage growth, so the maximum employer contribution changes annually.
  • Federal unemployment tax (FUTA) is typically 0.6% of the first $7,000 of each employee's wages after the standard credit is applied.
  • State unemployment tax (SUTA) varies by state and employer history, ranging from under 1% to over 5% of payroll.
  • An employer's payroll tax obligation is separate from income tax withholding and is paid directly from company funds, not deducted from employee wages.

How the Social Security wage cap affects what employers pay

The Social Security tax cap means employers stop paying the 6.2% Social Security tax once an employee reaches the annual wage threshold. In 2024, that threshold was $168,600. If an employee earns $200,000 in a year, the employer pays 6.2% only on the first $168,600, not on the remaining $31,400.

This cap resets every January 1st and is adjusted upward most years based on the Social Security Administration's calculation of average wage growth. The Medicare portion (1.45%) has no cap — employers pay it on all wages, no matter how high an employee's salary is.

High-wage earners and salaried employees are more affected by this cap than hourly workers. A company with mostly minimum-wage employees will pay Social Security tax on nearly all payroll, while a company with highly paid executives will hit the cap on each executive's earnings partway through the year.

Unemployment taxes: federal and state differences

Federal unemployment tax (FUTA) is 6% of the first $7,000 of each employee's annual wages. However, employers that pay state unemployment tax (SUTA) on time receive a credit of up to 5.4%, bringing the effective FUTA rate down to 0.6% for most employers. This credit exists because the federal government designed FUTA to fund state unemployment programs.

State unemployment tax (SUTA) is where the real variation happens. Each state sets its own rate, which typically ranges from 0.5% to 5.5% of payroll, though some states go higher. The rate depends on two factors: the state's unemployment insurance fund balance and the employer's experience rating (how many former employees have drawn unemployment benefits after leaving that company).

A new business usually pays the state's standard rate. As the company operates, its experience rating improves or worsens based on claims history. An employer with few layoffs and low claims may see rates drop to 0.5% or lower. An employer with high turnover or frequent claims may see rates rise to 3%, 4%, or higher. Some states also charge a small administrative fee on top of the rate.

What happens when an employee crosses the Social Security wage cap

Once an employee's cumulative wages hit the Social Security cap in a given year, the employer stops withholding the employee's 6.2% Social Security tax and stops paying the employer's 6.2% contribution. The employee's Medicare withholding (1.45%) and the employer's Medicare contribution (1.45%) continue for the rest of the year.

Payroll software typically tracks this automatically and stops the Social Security deduction once the cap is reached. If an employee changes jobs mid-year, they may pay Social Security tax to multiple employers on wages that total more than the cap, but they can claim a credit on their tax return for the overpayment.

Employers do not get a credit for overpaying Social Security tax on an employee who worked for multiple employers. The employer's obligation is straightforward to stop paying once the cap is reached for that employee at that company.

Additional payroll taxes in certain states and cities

Beyond federal Social Security, Medicare, and unemployment taxes, some states and cities impose their own payroll taxes. These vary widely and may be called earned income tax, local income tax, or occupational taxes.

California, New York, and New Jersey, for example, have state income tax withholding requirements in addition to federal withholding. Some cities, including Philadelphia and Washington, D.C., charge local income tax. A few states have temporary or permanent employer-side payroll taxes for specific purposes — for instance, some states fund paid family leave or short-term disability programs through employer contributions.

The total payroll tax burden for an employer depends heavily on location. A business in a state with no income tax and low unemployment rates may pay significantly less in total payroll taxes than an identical business in a high-tax state.

How payroll tax obligations are reported and paid

Employers report payroll taxes on Form 941 (federal income tax withholding, Social Security, and Medicare) filed quarterly with the IRS. They report FUTA separately on Form 940, filed annually. State unemployment taxes are reported on each state's form, usually quarterly or annually depending on the state.

The frequency of payment depends on the size of the payroll. Employers with large payrolls may be required to pay federal payroll taxes weekly or biweekly. Smaller employers may pay monthly or quarterly. The IRS notifies employers of their payment schedule based on total tax liability.

Employers must also keep records of gross wages, tax withholdings, and tax payments for at least four years. These records are used to verify Social Security credits for employees and to resolve any disputes with the IRS or state tax agencies.

Self-employed workers and payroll tax

Self-employed people pay both the employer and employee portions of Social Security and Medicare tax, totaling 15.3%, through self-employment tax on Schedule SE. They do not pay FUTA or SUTA unless they have employees on payroll.

A self-employed person earning $50,000 pays 15.3% on that income (subject to the Social Security cap), whereas an employee earning $50,000 pays only 7.65% and the employer pays the other 7.65%. This is why self-employment tax is often cited as a larger burden on sole proprietors and independent contractors.

Frequently Asked Questions

Does the employer's payroll tax come out of the employee's paycheck?

No. The employer's payroll tax is paid by the company from its own funds. The employee's paycheck has withholding (7.65% for Social Security and Medicare) deducted, but the employer's matching 7.65% is separate and never appears on the employee's pay stub.

What is the Social Security wage cap for 2024 and 2025?

The cap was $168,600 in 2024. The 2025 cap has not been officially announced yet by the Social Security Administration, but it typically increases by 2% to 3% annually. Check the SSA website in October or November for the official 2025 figure.

Can an employer deduct payroll taxes as a business expense?

Yes. Employer payroll taxes are deductible as a business expense on the company's tax return. This is one reason payroll tax is sometimes described as less burdensome than income tax — the cost reduces taxable business income.

What happens if an employer fails to pay payroll taxes?

The IRS can assess penalties, interest, and liens against the business. In severe cases, the IRS can pursue the business owner personally for unpaid payroll taxes, especially if the owner is responsible for collecting and paying them. Payroll tax debt does not go away in bankruptcy.

Do employers pay payroll tax on bonuses and commissions?

Yes. Any compensation paid to an employee — bonuses, commissions, overtime, paid time off — is subject to the same payroll tax rates as regular wages, up to the Social Security cap.