What employer payroll taxes are and who pays them

Employer payroll taxes are taxes that a business pays to the federal government, and sometimes to state and local governments, based on the wages it pays to employees. These are separate from the payroll taxes that employees see deducted from their paychecks. The employer writes a check for these taxes directly to the government, not the employee.

Every employer with employees must pay employer payroll taxes. This includes sole proprietors with one employee, large corporations, nonprofits, and government agencies. The only exception is if you are self-employed and have no employees — in that case, you pay self-employment tax instead, which covers both the employer and employee portions.

Employer payroll taxes fund three federal programs: Social Security, Medicare, and unemployment insurance. The employer's share is calculated as a percentage of each employee's wages, up to an annual wage cap that changes each year.

Key Takeaways

  • Employers pay a 6.2% Social Security tax and a 1.45% Medicare tax on employee wages, with Social Security capped at a maximum annual wage.
  • Employers also pay federal and state unemployment insurance taxes, which vary by state and by the employer's history of layoffs.
  • These taxes are separate from what employees pay and are calculated on gross wages before any deductions.
  • Employers must deposit these taxes on a schedule set by the IRS, usually monthly or semi-weekly depending on the amount owed.
  • Failure to pay employer payroll taxes on time results in penalties, interest, and potential criminal charges against the business owner.

Social Security and Medicare taxes employers must pay

The employer's portion of Social Security tax is 6.2% of each employee's gross wages. This tax is capped — in 2024, employers pay the 6.2% rate only on the first $168,600 of each employee's annual wages. Once an employee reaches that wage cap in a calendar year, the employer stops paying Social Security tax on additional wages that employee earns. The wage cap increases each year based on inflation.

The employer's portion of Medicare tax is 1.45% of each employee's gross wages, with no annual cap. This means an employer pays Medicare tax on all wages, no matter how high. Additionally, employers must pay an extra 0.9% Medicare tax on wages above $200,000 per employee per year (this threshold does not adjust for inflation).

Together, the base employer Social Security and Medicare taxes equal 7.65% of wages up to the Social Security cap, and 1.45% on wages above that cap. These percentages are fixed by federal law and do not change based on the employer's industry, size, or location.

Unemployment insurance taxes employers pay

Employers also pay federal and state unemployment insurance taxes. The federal unemployment tax (FUTA) is 6% of the first $7,000 of each employee's annual wages. However, employers receive a credit of up to 5.4% if they pay state unemployment tax on time, which usually reduces the federal rate to 0.6%.

State unemployment tax (SUTA) rates vary significantly by state and depend on the employer's experience rating — a measure of how many former employees have filed for unemployment benefits. A new business or one with few layoffs pays a lower rate; a business with a history of layoffs pays a higher rate. SUTA rates typically range from less than 1% to over 5%, and the wage base (the amount of wages subject to the tax) also varies by state.

Some states have additional unemployment insurance programs, such as paid family leave or temporary disability insurance, which add to the employer's tax burden. These vary widely and are not present in all states.

How employer payroll taxes are calculated and reported

Employer payroll taxes are calculated on gross wages — the total amount paid to an employee before any deductions for income tax, health insurance, or retirement contributions. The calculation is straightforward: multiply the gross wage by the applicable tax rate for each tax type.

For example, if an employee earns $5,000 in a pay period and the employer has not yet reached the Social Security wage cap for the year, the employer owes 6.2% Social Security tax ($310), 1.45% Medicare tax ($72.50), and the applicable FUTA and SUTA rates on the first $7,000 of annual wages (if not yet reached).

Employers report these taxes on Form 941 (Employer's Quarterly Federal Tax Return) for federal income tax withholding and employer Social Security and Medicare taxes. FUTA is reported separately on Form 940 (Employer's Annual Federal Unemployment Tax Return). State unemployment taxes are reported on forms specific to each state, usually quarterly or annually depending on the state.

When employers must deposit and pay these taxes

The IRS sets a deposit schedule based on how much tax an employer owes. Most employers deposit taxes either monthly or semi-weekly. A semi-weekly schedule means deposits are due on Wednesday for payroll processed Monday through Wednesday, and on Friday for payroll processed Thursday through Sunday. A monthly schedule means one deposit per month, usually by the 15th of the following month.

New employers typically start on a monthly schedule and may move to semi-weekly if they owe more than a certain amount per quarter. The IRS notifies employers of their required schedule, and it can change from year to year.

Deposits are made through the Electronic Federal Tax Payment System (EFTPS), a free service run by the U.S. Department of the Treasury. Some employers use a payroll processor or accountant to handle deposits on their behalf, but the employer remains responsible if the payment is late.

Penalties and consequences for late or missing payments

If an employer does not deposit payroll taxes on time, the IRS charges a penalty based on how late the payment is. A payment that is 1 to 5 days late incurs a 2% penalty; 6 to 15 days late incurs 5%; 16 or more days late incurs 10%. If the IRS has to take collection action, the penalty can reach 15%.

The IRS also charges interest on unpaid taxes, compounded daily. Interest rates change quarterly and are tied to the federal short-term interest rate. As of early 2024, the rate is 8% per year, but this varies.

Failure to pay employer payroll taxes is a serious matter. The business owner can be held personally liable for unpaid taxes through the responsible person penalty, even if the business itself cannot pay. In cases of willful non-payment, criminal charges are possible, including fines and imprisonment. The IRS prioritizes collection of payroll taxes because these funds are held in trust for employees' Social Security and Medicare accounts.

How employer payroll taxes differ from employee payroll taxes

Employees see payroll taxes deducted from their paychecks: 6.2% Social Security, 1.45% Medicare, and federal income tax withholding (which varies by the employee's W-4 form). The employer collects these amounts and remits them to the government on the employee's behalf.

Employer payroll taxes are additional taxes the employer pays out of its own funds. An employee earning $5,000 in a pay period costs the employer not just $5,000 in wages, but also approximately $382.50 in employer Social Security and Medicare taxes (6.2% + 1.45%), plus unemployment taxes. This total cost to the employer is sometimes called the fully loaded cost of employment.

From the employee's perspective, they see only their own portion deducted. The employer's portion is invisible to the employee but is a real cost to the business.

Frequently Asked Questions

Do I have to pay employer payroll taxes if I have only one employee?

Yes. Any business with even one employee must pay employer payroll taxes. The only exception is if you are self-employed with no employees, in which case you pay self-employment tax instead. If you hire even a part-time employee, you must register with the IRS and begin paying employer taxes.

What happens if I cannot afford to pay employer payroll taxes?

Contact the IRS when ready. The IRS offers payment plans and can sometimes temporarily delay collection. However, unpaid payroll taxes accrue penalties and interest daily, and the responsible person penalty can be applied to business owners personally. Ignoring the debt makes it worse. The IRS Taxpayer Advocate Service can also help if you are in financial hardship.

Are employer payroll taxes the same in every state?

Federal employer taxes (Social Security, Medicare, FUTA) are the same everywhere. State unemployment taxes vary significantly by state — rates, wage bases, and additional programs like paid family leave differ. You must follow the rules of every state where you have employees, even if you are based elsewhere.

Can I deduct employer payroll taxes as a business expense?

Yes. Employer payroll taxes are a deductible business expense on your federal income tax return. You report them on your business tax return (Form 1120, 1120-S, 1040-C, or 1065, depending on your business structure). This reduces your taxable income.

What if an employee is misclassified as an independent contractor?

If the IRS determines that someone you treated as an independent contractor should have been classified as an employee, you become liable for all unpaid employer payroll taxes, plus penalties and interest going back several years. The IRS uses a three-part test (behavioral control, financial control, and relationship type) to determine worker status. Misclassification is costly, so consult a tax professional if you are unsure.