Employers pay a combined federal payroll tax rate of at least 8.25% on most employee wages, before any state taxes. That’s 6.2% for Social Security, 1.45% for Medicare, and an effective 0.6% for federal unemployment insurance. Once state unemployment taxes are added, total employer-side payroll costs typically land between 10% and 14% of gross wages, though how much employers pay in payroll tax on a specific worker depends on the state, the industry, the employer’s claims history, and how the employee’s earnings compare to the Social Security wage cap.
Social Security Tax: 6.2% Up to the Wage Cap
Every employer owes 6.2% of each employee’s gross wages to fund Social Security. The rate has been fixed by statute since 1990 and applies equally to the employer and the employee, for a combined 12.4%.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The employer’s share is a separate cost on top of the paycheck, not a deduction from it.
The tax stops at an annual wage cap. For 2026, that cap is $184,500.2Social Security Administration. Contribution and Benefit Base Once an employee’s year-to-date earnings cross that threshold, the employer stops owing 6.2% on any additional wages for the rest of the calendar year. At the full cap, the maximum Social Security bill is $11,439 per employee. For everyone earning below that, the math is just gross wages times 0.062.
Medicare Tax: 1.45% With No Ceiling
Employers also owe 1.45% of every dollar paid to each employee for Medicare’s Hospital Insurance program. Medicare tax has no wage cap. Whether an employee earns $30,000 or $300,000, the employer pays 1.45% on the full amount.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The employee pays a matching 1.45%, for a combined Medicare rate of 2.9%.3Social Security Administration. Social Security and Medicare Tax Rates
The 0.9% Additional Medicare Tax
When an employee’s cumulative wages pass $200,000 in a calendar year, the employer must withhold an extra 0.9% from that employee’s pay. The employer does not match this amount. It’s a withholding responsibility, not an added employer cost.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax The $200,000 trigger applies regardless of the employee’s filing status or income from other jobs.
Missing the withholding creates real exposure. If the employer fails to withhold the 0.9%, it is liable for the uncollected tax unless the employee pays it on their own return, and even then penalties for the reporting failure can still apply.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Federal Unemployment (FUTA): 0.6% on the First $7,000
FUTA funds a portion of state unemployment insurance programs and is paid entirely by the employer. The statutory rate is 6.0%, but it only applies to the first $7,000 of wages per employee per year. Most employers never pay the full 6.0% because a credit of up to 5.4% is available to those who pay their state unemployment taxes on time.5Internal Revenue Service. Topic No. 759, Form 940 – FUTA Tax Return Filing and Deposit Requirements
With the full credit, the effective FUTA rate drops to 0.6%, and the maximum annual cost per employee is $42.6Department of Labor – Office of Unemployment Insurance. Unemployment Insurance Tax Fact Sheet That makes FUTA the smallest line on most employers’ payroll tax ledgers.
Credit Reduction States
The 5.4% credit shrinks for employers in states that borrowed from the federal unemployment trust fund and failed to repay within two years. The reduction directly raises an employer’s effective FUTA rate, and the list changes annually. For 2025, employers in California faced a credit reduction of 1.2 percentage points, and employers in the U.S. Virgin Islands faced a reduction of 4.5 percentage points.7Federal Register. Notice of the FUTA Credit Reductions Applicable for 2025 The 2026 list won’t be finalized until November 2026, so employers in states with outstanding federal loans should budget for a higher-than-baseline FUTA bill.
State Unemployment Tax: The Variable Piece
Every state runs its own unemployment insurance program funded by employer contributions, and this is where costs diverge from one business to the next.
Each employer carries an experience rating based on how many former employees have successfully claimed unemployment benefits. Frequent layoffs or high turnover produce a higher rate; a stable workforce produces a lower one. New businesses without a claims history get a default rate, typically between about 1% and 6% depending on the state and industry, and that rate adjusts over time.
State taxable wage bases vary widely too. While federal FUTA stops at $7,000, state wage bases for 2026 range from $7,000 to $78,200. A higher wage base means you keep paying state unemployment tax on a larger portion of each employee’s earnings before hitting the cap. Rates and bases change annually, so the only way to budget accurately is to check your state’s unemployment agency notice at the start of each year.
A Worked Example at $60,000
For an employee earning $60,000 in 2026, the employer’s payroll tax bill looks like this:
- Social Security (6.2%): $3,720
- Medicare (1.45%): $870
- FUTA (0.6% on first $7,000): $42
- State unemployment (estimated 2–4% on the state wage base): varies
The federal portion alone totals $4,632, or about 7.7% of the salary. Add a typical state unemployment rate and the total lands somewhere around $5,500 to $7,000. For higher earners, the Social Security tax caps at $11,439 per year, but Medicare keeps going with no limit.2Social Security Administration. Contribution and Benefit Base
A handful of states also mandate employer contributions to disability insurance or paid family leave programs, which can add another fraction of a percent. These programs exist in fewer than a dozen states, and several are funded entirely by employee withholding. If you operate in one, check your state labor agency for current rates.
What Counts as Taxable Wages
Not everything paid to a worker is subject to payroll tax, and the exclusions can meaningfully change the real cost per employee.
Cash wages, salaries, bonuses, and commissions are all taxable. So are several fringe benefits employers sometimes assume are exempt: group-term life insurance coverage above $50,000 in value, educational assistance above $5,250 per year, and dependent care benefits above $7,500 all count as taxable wages for Social Security and Medicare.8IRS. Employer’s Tax Guide to Fringe Benefits Moving expense reimbursements are fully taxable in 2026, with an exception only for active-duty military relocations.
On the other side, employer contributions to qualifying health insurance premiums are exempt from both income and payroll taxes. Qualified retirement plan contributions, including 401(k) employer matches, are excluded from FICA while they stay in the plan. Qualified transportation benefits are excluded up to $340 per month for transit passes or parking in 2026.8IRS. Employer’s Tax Guide to Fringe Benefits
These Taxes Apply Only to Employees
Every rate in this article applies to employees. Independent contractors handle their own self-employment taxes, and the employer owes no Social Security, Medicare, or unemployment tax on payments to a genuine contractor. That distinction makes contractor classification tempting, but the IRS looks at the actual working relationship, not the contract label. The analysis turns on three areas: whether you control how the work gets done, whether you control the financial aspects of the job, and the nature of the ongoing relationship.9Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
Getting it wrong triggers back taxes. If an employer treated a worker as a contractor when they should have been an employee, the employer becomes liable for 1.5% of wages as income tax withholding plus 20% of the employee’s share of Social Security and Medicare taxes. Those rates double to 3% and 40% if the employer also failed to file the required information returns for that worker.10Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employer’s Liability for Certain Employment Taxes If the IRS concludes the misclassification was intentional, these reduced rates don’t apply and the employer owes the full tax plus standard penalties.
The practical takeaway for budgeting: plan on roughly 10% to 14% above gross wages for payroll taxes across all levels of government. Where in that band a given business lands depends on the state unemployment rate, the employer’s experience rating, and how much employees earn relative to the Social Security wage cap.