What employer payroll taxes are and why you owe them

Employer payroll taxes are the taxes your business must pay to the federal government, your state, and sometimes your local government based on what you pay your employees. Unlike income tax withholding — which you deduct from employee paychecks — employer payroll taxes come directly from your business account. You owe them whether or not your employees claim any tax deductions.

The main employer payroll taxes are Social Security tax (6.2% of each employee's wages up to an annual cap) and Medicare tax (1.45% of all wages with no cap). Most states also require state unemployment insurance tax, and some cities charge local payroll tax. These are separate from federal unemployment insurance tax (FUTA), which is also an employer-only tax.

The IRS requires you to report and pay these taxes on a schedule — usually quarterly or monthly depending on how much you owe. Missing payments or reporting important date can result in penalties and interest, so understanding the calculation is essential to staying compliant.

Key Takeaways

  • Employer Social Security tax is 6.2% of each employee's wages up to $168,600 per year (the cap changes annually), and employer Medicare tax is 1.45% of all wages with no annual limit.
  • Federal unemployment insurance (FUTA) is 6% of the first $7,000 of each employee's annual wages, though you may receive a credit if you pay state unemployment tax on time.
  • Most states charge unemployment insurance tax on payroll, and the rate varies by state and by your industry's claims history.
  • You must deposit employer payroll taxes on a schedule set by the IRS based on how much you owe — typically monthly or quarterly — using the Electronic Federal Tax Payment System (EFTPS).
  • Form 941 (quarterly) or Form 944 (annual, for very small employers) is how you report federal payroll taxes to the IRS.

How to calculate Social Security and Medicare tax

Social Security and Medicare taxes are calculated on gross wages — the total amount you pay an employee before any deductions. For each employee, multiply their gross wages by the employer tax rate. Social Security is 6.2%, but only on wages up to the annual wage base, which the IRS adjusts each year. For 2024, that cap is $168,600 per employee. Medicare tax is 1.45% on all wages with no cap.

Here is a concrete example: if an employee earns $60,000 per year, you owe 6.2% × $60,000 = $3,720 in employer Social Security tax and 1.45% × $60,000 = $870 in employer Medicare tax. If another employee earns $200,000 per year, you owe 6.2% × $168,600 = $10,453.20 in Social Security tax (capped at the wage base) and 1.45% × $200,000 = $2,900 in Medicare tax.

Add the Social Security and Medicare amounts for all your employees to get your total federal payroll tax liability for that pay period. This is the amount you must deposit with the IRS on your deposit schedule.

Understanding federal unemployment insurance (FUTA)

Federal unemployment insurance tax (FUTA) is a separate employer tax that funds unemployment benefits. The standard rate is 6% of the first $7,000 of each employee's annual wages. However, if you pay your state unemployment insurance tax on time and in full, you receive a credit of up to 5.4%, which reduces your FUTA rate to as low as 0.6%.

To calculate FUTA, multiply 6% (or your reduced rate if you have a credit) by the first $7,000 of each employee's annual wages. If an employee earns $50,000 per year, you owe 6% × $7,000 = $420 in FUTA tax (or $42 if you have the full 5.4% credit). Once an employee's cumulative wages for the year reach $7,000, you stop calculating FUTA on their additional earnings.

FUTA is reported annually on Form 940, which you file with the IRS by January 31 of the following year. You may need to make quarterly deposits if your FUTA liability exceeds $500 in a quarter, though many small employers can pay the full amount when they file the annual form.

State and local payroll tax obligations

State unemployment insurance (SUI) tax rates and wage bases vary significantly by state. Some states tax all wages; others have an annual wage cap similar to Social Security. Rates also depend on your industry and your company's claims history — employers in industries with higher unemployment claims pay higher rates. Contact your state's department of labor or unemployment office to find your specific rate and wage base.

A few states also charge state income tax withholding on employee paychecks, which is separate from employer payroll tax. Some cities — including New York City and Washington, D.C. — charge local payroll taxes on employers. These vary by location, so check with your city or county tax authority to see if you owe local payroll tax.

State and local taxes are usually deposited on the same schedule as federal payroll taxes, though some states require different timing. Many states offer online portals or phone lines where you can look up your account and deposit schedule.

Setting up your deposit schedule with the IRS

The IRS uses the Electronic Federal Tax Payment System (EFTPS) to collect employer payroll taxes. You must register for EFTPS if you have payroll tax obligations. Registration is free and can be done online at eftps.gov or by phone at 1-800-555-4477.

Your deposit schedule depends on how much payroll tax you owe. The IRS divides employers into two categories: semi-weekly depositors and monthly depositors. If your total federal payroll tax liability (Social Security, Medicare, and income tax withholding combined) is $50,000 or less in a lookback period, you are a monthly depositor and must deposit by the 15th of the following month. If it exceeds $50,000, you are a semi-weekly depositor and must deposit within one or two business days depending on which day of the week you paid employees.

The IRS recalculates your deposit schedule each year based on your previous year's liability. New employers are typically assigned to the monthly schedule until they have a full year of history. If your liability changes significantly, your schedule may change the following year.

Reporting payroll taxes on Form 941 or Form 944

Form 941 (Employer's Quarterly Federal Tax Return) is the main form you use to report federal payroll taxes to the IRS. You file it four times per year — once for each quarter — by the last day of the month following the quarter (April 30 for Q1, July 31 for Q2, October 31 for Q3, and January 31 for Q4).

On Form 941, you report total wages paid, federal income tax withheld from employee paychecks, employer and employee Social Security tax, and employer and employee Medicare tax. The form also includes a line for any tax deposits you made during the quarter. If your deposits equal or exceed your liability, you owe nothing additional. If your deposits were less than your liability, you owe the difference by the filing important date.

Very small employers — those with an annual payroll tax liability of $1,000 or less — may use Form 944 instead, which is filed once per year by January 31. Form 944 combines all four quarters into a single annual return. You must request permission from the IRS to use Form 944; most employers use Form 941.

Common mistakes to avoid when calculating payroll taxes

One frequent error is using net wages instead of gross wages. Payroll taxes are calculated on gross pay before any deductions for health insurance, retirement contributions, or other benefits. Only certain pre-tax deductions (like health insurance premiums) reduce the wages subject to income tax withholding, but they do not reduce Social Security or Medicare tax.

Another mistake is forgetting to update the Social Security wage base each year. The IRS raises the cap annually to account for wage growth. If you use last year's cap, you will under-withhold for high-earning employees early in the year and over-withhold later, creating reconciliation problems on your quarterly return.

A third common error is confusing employer payroll taxes with employee payroll taxes. You must pay both — the employee portion is withheld from paychecks, and the employer portion comes from your business account. If you only deposit the employee portion, you will owe the employer portion plus penalties and interest.

Frequently Asked Questions

What is the difference between payroll tax deposits and payroll tax reporting?

Deposits are the actual payments you send to the IRS on your deposit schedule (monthly or semi-weekly). Reporting is when you file Form 941 or Form 944 to tell the IRS how much you owe for the quarter or year. You deposit throughout the period, then report and reconcile on the form.

Do I owe employer payroll taxes for independent contractors?

No. Independent contractors are responsible for their own self-employment taxes. You only owe employer payroll taxes for employees on your payroll. If you are unsure whether someone is an employee or contractor, the IRS has a test based on how much control you have over their work.

What happens if I miss a payroll tax deposit important date?

The IRS charges a penalty based on how late the deposit is — typically 2% to 15% of the unpaid amount depending on how many days late. Interest also accrues on the unpaid balance. If you realize you missed a important date, deposit the amount when ready and file Form 941 on time to minimize penalties.

Can I reduce my payroll taxes by paying employees in cash?

No. You owe payroll taxes on all compensation you give employees, regardless of how you pay them. Paying in cash does not change your tax obligation and can result in serious penalties if discovered during an audit.

Do I need to pay payroll taxes if my business has no profit?

Yes. Payroll taxes are based on wages paid, not on business profit. Even if your business loses money, you owe payroll taxes on employee wages. This is one reason payroll taxes are a significant cost for new businesses.