The employer's share of payroll tax

Employers pay 6.2% of each employee's gross wages toward Social Security and 1.45% toward Medicare. These are separate from what the employer withholds from the employee's paycheck. The employer sends both the employee's portion and the employer's portion to the IRS, usually monthly or semi-weekly depending on the size of the payroll.

The Social Security tax (6.2%) applies only to wages up to an annual cap, which changes each year. In 2024, that cap is $168,600 — meaning an employer stops paying the 6.2% once an employee's wages hit that amount. Medicare tax (1.45%) has no wage cap and continues on all earnings.

These employer taxes are a real cost to the business. They are not optional, and they are not deducted from the employee's salary. If you hire someone at $50,000 per year, the employer's payroll tax cost is roughly $3,825 on top of that salary ($50,000 × 0.062 + $50,000 × 0.0145).

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.
  • These employer taxes are separate from what is withheld from the employee's paycheck and are paid directly to the IRS by the employer.
  • Employers with high-income employees stop paying the 6.2% Social Security tax once that employee reaches the annual wage cap, but continue paying Medicare tax on all wages.
  • Additional Medicare tax of 0.9% applies to employers when an employee's wages exceed $200,000 (single) or $250,000 (married filing jointly), though this is less common for most businesses.

How the wage cap affects what employers pay

The Social Security wage cap means employers do not pay 6.2% on every dollar an employee earns. Once an employee's cumulative wages reach the cap for the year, the employer stops withholding and paying the 6.2% Social Security tax on additional earnings.

This matters most for salaried employees and those who earn above the cap. An employee earning $200,000 per year will have the 6.2% Social Security tax applied only to the first $168,600 of wages (in 2024). The remaining $31,400 is not subject to the 6.2% tax, though it is still subject to the 1.45% Medicare tax.

The wage cap is adjusted annually by the Social Security Administration based on wage growth. It typically increases each year, so the threshold changes. Payroll software usually tracks this automatically and stops explore the 6.2% rate once the cap is reached.

Additional Medicare tax for high earners

There is a second Medicare tax that employers must pay in certain situations. If an employee's wages exceed $200,000 (for single filers) or $250,000 (for married couples filing jointly), the employer pays an additional 0.9% Medicare tax on the excess wages.

This additional tax applies to the employer, not the employee. It is separate from the standard 1.45% Medicare tax and is only triggered when an individual employee crosses the income threshold. Most small businesses do not encounter this tax because few employees earn at those levels.

When employers pay these taxes

Employers do not pay payroll taxes once a year. Instead, they deposit them on a schedule set by the IRS based on the size of the payroll. Small employers typically deposit monthly, while larger employers deposit semi-weekly or even more frequently.

The employer calculates the total tax owed (employee withholding plus employer share) and sends it to the IRS through the Electronic Federal Tax Payment System (EFTPS) or through an authorized payment processor. Missing a deposit important date results in penalties and interest, so payroll departments track these dates carefully.

Employers also file Form 941 (Employer's Quarterly Federal Tax Return) each quarter to report all wages paid and all taxes withheld and paid. This reconciles the deposits made during the quarter with the actual tax owed.

Self-employed workers and payroll tax

Self-employed people do not have an employer to pay half the payroll tax. Instead, they pay both the employee and employer portions themselves, called self-employment tax. This totals 15.3% (12.4% for Social Security and 2.9% for Medicare) on net business income, though they can deduct half of it as a business expense.

A self-employed person earning $50,000 in net income would owe roughly $7,065 in self-employment tax, compared to the $3,825 an employer would pay on behalf of an employee earning the same amount. This is one reason self-employment income is often higher than W-2 wages for the same work — the individual bears the full payroll tax burden.

State and local payroll taxes

In addition to federal payroll taxes, many states and some cities require employers to pay state unemployment insurance (SUI) tax. This rate varies by state and by industry, ranging from roughly 0.5% to 5% of wages, depending on the employer's history of claims and the state's formula.

Some states also have state income tax withholding, which the employer collects from the employee's paycheck and sends to the state. A few states have additional taxes on employers, such as a state disability insurance tax. These vary widely, so employers in high-tax states may pay significantly more in total payroll taxes than those in low-tax states.

Frequently Asked Questions

Can an employer deduct payroll taxes as a business expense?

Yes. The employer's share of payroll taxes (6.2% Social Security and 1.45% Medicare) is a deductible business expense. This reduces the business's taxable income. The employee's portion, which the employer withholds and remits, is not deductible because it is the employee's tax liability, not the employer's.

What happens if an employer does not pay payroll taxes?

The IRS assesses penalties, interest, and can pursue collection action against the business and sometimes against individual owners. Unpaid payroll taxes are treated seriously because they represent money owed by employees. The employer can face criminal charges in cases of willful non-payment.

Do employers pay payroll tax on bonuses and commissions?

Yes. Any compensation paid to an employee — bonuses, commissions, overtime pay, and fringe benefits — is subject to payroll taxes at the same rates as regular wages. The only exceptions are certain non-taxable benefits like health insurance premiums paid by the employer.

Is payroll tax the same as income tax withholding?

No. Payroll tax (Social Security and Medicare) is a fixed percentage based on wages. Income tax withholding is separate and varies based on the employee's W-4 form and filing status. An employer pays both: the payroll taxes and the withheld income tax, both sent to the IRS.

Do employers pay payroll taxes on independent contractors?

No. Independent contractors are responsible for their own self-employment taxes. The employer issues a 1099 form instead of a W-2 and does not withhold or pay payroll taxes. This is why misclassifying an employee as a contractor can result in significant back taxes and penalties.