What employer payroll taxes are and why you calculate them
Employer payroll taxes are the taxes your business owes based on what you pay your employees. Unlike income tax withholding (which comes out of the employee's paycheck), employer taxes are your company's direct obligation. You owe them whether or not you withhold anything from your workers.
The main employer taxes are Social Security tax (6.2% of wages up to an annual cap), Medicare tax (1.45% of all wages with no cap), and federal unemployment tax or FUTA (0.6% of the first $7,000 per employee per year, though this varies by state). Most states also require state unemployment insurance tax. You calculate these separately from income tax withholding and pay them on a different schedule.
Getting the calculation right matters because underpayment triggers penalties and interest, and the IRS can hold you personally liable even if your business is a corporation. Overpayment means you've given the government an interest-free loan, so accuracy protects both your cash flow and your compliance record.
Key Takeaways
- Social Security tax is 6.2% of wages up to $168,600 per employee in 2024, while Medicare tax is 1.45% of all wages with no limit.
- FUTA (federal unemployment tax) is 0.6% of the first $7,000 per employee per year, but most states offer a credit that reduces this to 0.6% only if you owe state unemployment tax.
- You calculate employer taxes on gross wages before any employee deductions, using the same wage base as employee Social Security and Medicare withholding.
- Employer taxes are due quarterly on Form 941 (federal) and on state forms that vary by location, with deposits required mid-month or mid-quarter depending on your payroll size.
- Self-employed people pay both the employee and employer share of Social Security and Medicare, calculated on Schedule SE and deducted on Form 1040.
Calculating Social Security and Medicare employer taxes
Start with gross wages — the total amount you pay each employee before any deductions. This is the wage base for both Social Security and Medicare taxes. Do not subtract health insurance premiums, 401(k) contributions, or any other employee deductions.
For Social Security tax, multiply each employee's gross wages by 6.2%, but only on wages up to the annual wage base. In 2024, that cap is $168,600 per employee. Once an employee reaches $168,600 in wages during the year, you stop calculating Social Security tax on their additional wages for the rest of that year. Medicare tax has no wage cap — you owe 1.45% on every dollar of gross wages, all year.
Example: An employee earns $5,000 in a pay period. Social Security tax is $5,000 × 0.062 = $310. Medicare tax is $5,000 × 0.0145 = $72.50. If this employee has already earned $168,600 earlier in the year, you would owe $0 in Social Security tax on this $5,000 but still owe the $72.50 Medicare tax.
Keep a running total for each employee throughout the year so you know when they cross the Social Security wage base. Payroll software does this automatically, but if you calculate by hand, a straightforward spreadsheet with columns for employee name, gross wages, year-to-date wages, and taxable Social Security wages prevents mistakes.
Calculating FUTA (federal unemployment tax)
FUTA is the federal unemployment insurance tax. The standard rate is 0.6% of the first $7,000 of wages per employee per year. This means you owe tax on only the first $7,000 each employee earns; wages above that are not subject to FUTA.
However, most employers receive a state unemployment tax credit that reduces the effective FUTA rate. If you pay state unemployment insurance tax (which nearly all states require), you can claim a credit of up to 5.4% against your federal FUTA liability. This brings your net federal rate down to 0.6% in most cases. A few states have not paid back federal loans from past recessions, so employers in those states may owe a higher FUTA rate — check your state's labor department website.
Example: You have one employee earning $8,000 in a year. FUTA is calculated on only the first $7,000, so $7,000 × 0.006 = $42 in federal FUTA before credits. If you owe state unemployment tax, you subtract the state credit and may owe $0 federal FUTA (or a small amount if your state has a credit reduction).
Track the $7,000 wage base per employee per year just as you do for Social Security. Once an employee reaches $7,000 in wages, stop calculating FUTA on their additional wages for that year.
State unemployment insurance taxes
Every state except South Dakota, Texas, Florida, Nevada, and Wyoming requires employers to pay state unemployment insurance tax. The rate and wage base vary significantly by state and sometimes by industry within a state.
Most states use a merit-rating system or experience rating, meaning your rate depends on your history of unemployment claims. New employers typically pay a standard rate set by the state. As you build a record, your rate may go down if few employees file for unemployment, or up if many do. Some states charge a flat rate regardless of claims history.
The wage base also varies — some states tax the first $7,000 per employee (matching the federal FUTA base), while others tax up to $15,000 or more. You must register with your state's labor or unemployment department when you hire your first employee. That agency will send you the rate and wage base for your business and tell you when and how to pay.
Because state rates and bases change annually, check your state's website or contact the department each January to confirm the current figures before you calculate your first payroll of the year.
Putting it together: a complete payroll tax calculation
Here is how all the pieces work together for one employee in one pay period. Assume the employee earns $3,000 gross, has not yet reached the Social Security or FUTA wage caps this year, and you are in a state with a 2.5% state unemployment rate and a $7,000 wage base.
| Tax | Rate | Wage Base | Calculation | Amount |
|---|---|---|---|---|
| Social Security (employer) | 6.2% | $3,000 (under annual cap) | $3,000 × 0.062 | $186.00 |
| Medicare (employer) | 1.45% | $3,000 (no cap) | $3,000 × 0.0145 | $43.50 |
| FUTA (federal) | 0.6% | $3,000 (under $7,000 annual cap) | $3,000 × 0.006 | $18.00 |
| State unemployment | 2.5% | $3,000 (under $7,000 annual cap) | $3,000 × 0.025 | $75.00 |
| Total employer payroll taxes | $322.50 |
This $322.50 is what the employer owes. It is separate from any income tax withholding or employee Social Security and Medicare taxes that come out of the employee's paycheck. You deposit these employer taxes according to your federal deposit schedule (usually quarterly on Form 941, or more frequently if you have a large payroll) and your state's schedule.
When and how to report and pay employer taxes
Federal employer taxes are reported quarterly on Form 941 (Employer's Quarterly Federal Tax Return), due the last day of the month following the end of each quarter. Quarters end on March 31, June 30, September 30, and December 31, so Form 941 is due April 30, July 31, October 31, and January 31.
However, you must deposit the taxes before you file the form. The IRS uses a deposit schedule based on how much payroll tax you owe. If you owe less than $2,500 in a quarter, you can pay it with the Form 941. If you owe $2,500 or more, you must make deposits during the quarter using the Electronic Federal Tax Payment System (EFTPS) or through your bank's bill-pay system. The deposit dates are either the 15th of the month following the end of each payroll period (semi-weekly schedule) or the 15th of the month following the end of each quarter (monthly schedule), depending on how much you owe.
State unemployment taxes are reported and paid on forms specific to each state, with important date and frequencies that vary. Most states require quarterly reporting and payment, though some require monthly deposits. Contact your state's labor or unemployment department for the exact form and due dates.
If you use payroll software or a payroll service, they typically calculate the taxes, track the wage bases, and remind you of deposit important date. If you calculate by hand, set calendar reminders for each quarter's deposit and filing important date to avoid penalties.
Self-employed payroll taxes
If you are self-employed, you owe both the employee and employer share of Social Security and Medicare taxes. This is calculated on Schedule SE (Self-Employment Tax) and attached to your Form 1040 when you file your annual tax return.
The combined rate is 15.3% (12.4% Social Security plus 2.9% Medicare) on 92.35% of your net self-employment income. You calculate net self-employment income on Schedule C (Profit or Loss from Business) by subtracting business expenses from business income. The Social Security portion is capped at the same annual wage base as employees ($168,600 in 2024), but Medicare has no cap.
You can deduct half of your self-employment tax as a business expense on Form 1040, which reduces your taxable income. Self-employed people do not make quarterly deposits of self-employment tax — instead, they may owe estimated tax quarterly on Form 1040-ES if their tax liability is expected to be $1,000 or more. Self-employment tax is paid in full when you file your annual return.
Frequently Asked Questions
Do I owe employer payroll taxes if I pay an employee in cash?
Yes. Employer payroll taxes are based on wages paid, regardless of how you pay them. Paying in cash does not change your tax obligation. You must report the wages and pay the taxes on the same schedule as any other employee. Failing to do so is tax evasion and can result in criminal penalties.
What happens if I miss a payroll tax deposit important date?
The IRS charges a penalty based on how late the deposit is — 2% if one to five days late, 5% if six to 15 days late, and 10% if more than 15 days late. Interest also accrues on the unpaid amount. If the failure is willful, criminal penalties explore. Contact the IRS when ready if you miss a important date and pay as soon as possible to minimize penalties.
Can I deduct employer payroll taxes as a business expense?
Yes. Employer payroll taxes are a deductible business expense on your tax return. You deduct them on Schedule C (if self-employed) or on your business tax return (if you file a corporate or partnership return). This is separate from the employee's income tax withholding, which is not a deduction because it belongs to the employee.
Do I owe employer payroll taxes on bonuses and commissions?
Yes. Bonuses, commissions, and any other compensation are subject to the same employer payroll taxes as regular wages. Calculate Social Security tax (up to the annual wage cap), Medicare tax (no cap), and FUTA and state unemployment taxes (up to the annual wage base) on the full amount of the bonus or commission.
What if an employee works in multiple states?
You owe state unemployment tax in the state where the employee works, not where your business is located. If an employee works in more than one state, you may owe state unemployment tax in multiple states. Contact each state's labor department to determine your filing and payment obligations.