An employer in the United States pays four main taxes on its workers’ wages: Social Security tax at 6.2%, Medicare tax at 1.45%, federal unemployment tax (FUTA) at an effective 0.6% for most businesses, and a state unemployment tax that varies widely by state and by the employer’s own history. Added together, the taxes an employer pays for employees usually run between 7.5% and 10% of payroll before state and local extras. On top of those employer-side costs, the business is legally responsible for withholding federal and state income tax and the employee’s share of Social Security and Medicare from each paycheck and sending it to the government on time.
Social Security Tax: 6.2% Up to a Wage Cap
The employer owes 6.2% of each employee’s wages to fund Social Security’s retirement, survivors, and disability programs.1Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax The tax applies only up to an annual wage cap. For 2026 that cap is $184,500, so the most an employer can owe in Social Security tax for one worker in a year is $11,439.2Social Security Administration. Contribution and Benefit Base Once wages cross the cap, the employer stops owing Social Security tax on any additional pay for that person for the rest of the year.
The employee pays a matching 6.2% out of their own wages, bringing the combined rate to 12.4%. The employer’s half is a business expense, not a deduction from the paycheck.
Medicare Tax: 1.45% on Every Dollar
Employers owe 1.45% of every dollar of wages for Medicare, with no cap.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The employee also pays 1.45%, for a combined rate of 2.9%. Unlike Social Security, this one never turns off no matter how much the worker earns.
Once an employee’s wages pass $200,000 in a calendar year, the employer must withhold an extra 0.9% Additional Medicare Tax from that worker’s pay.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Read that carefully: the Additional Medicare Tax is the employee’s tax. There is no employer match. Your rate stays at 1.45% no matter what the worker earns.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
Social Security and Medicare taxes are reported together each quarter on Form 941, where employers reconcile what they owe against the deposits already made.5Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return
Federal Unemployment Tax (FUTA)
FUTA funds unemployment benefits for workers who lose their jobs, and it falls entirely on the employer. You cannot deduct any of it from a worker’s paycheck.6Office of the Law Revision Counsel. 26 USC Chapter 23 – Federal Unemployment Tax Act
The stated rate is 6.0%, applied only to the first $7,000 each employee earns in a year. Almost no employer actually pays that much. If you pay your state unemployment contributions on time, you receive a federal credit of up to 5.4%, dropping the effective FUTA rate to 0.6%. That works out to a maximum of $42 per employee per year.6Office of the Law Revision Counsel. 26 USC Chapter 23 – Federal Unemployment Tax Act
FUTA is reported once a year on Form 940, though you must deposit during the year whenever your cumulative liability tops $500 in a quarter.7Internal Revenue Service. Instructions for Form 940
Credit Reduction States
The 5.4% credit isn’t guaranteed everywhere. When a state borrows from the federal government to pay unemployment benefits and doesn’t repay on schedule, employers in that state lose 0.3% of the credit for each year the debt stays outstanding. Your effective FUTA rate goes up even if you personally paid your state taxes on time. A 0.3% reduction pushes your effective rate from 0.6% to 0.9%, adding roughly $21 per employee. Reductions compound each year the loans go unpaid. For 2025, the Department of Labor identified California and the U.S. Virgin Islands as credit reduction jurisdictions. The list changes annually, so check Schedule A of Form 940 before filing.8Internal Revenue Service. FUTA Credit Reduction
State Unemployment Tax (SUTA)
Every state runs its own unemployment insurance program alongside the federal one, and the rates vary dramatically. Employers with clean track records can pay nearly 0%. In states with expensive systems, rates can top 10%. The taxable wage base also varies: some states match the federal $7,000 floor, others exceed $70,000.
Your specific rate depends heavily on your “experience rating,” which reflects how many former employees have collected unemployment benefits. High turnover and frequent layoffs push the rate up. Stable employment keeps it down. New businesses start at a default rate set by the state and build their own experience rating over a few years.
In most states SUTA is paid entirely by the employer. A handful of states require a small employee contribution as well, but the employer always carries the primary obligation, and reporting is typically quarterly to the state workforce agency.
Income Tax Withholding: The Employer’s Collection Role
Federal and state income taxes are the employee’s liability, not the employer’s. But the employer is legally responsible for calculating the right amount, deducting it from each paycheck, and forwarding it to the government. You base the calculation on the employee’s Form W-4, which covers filing status, dependents, and any additional withholding they’ve requested.9Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate
Most states with an income tax run a parallel withholding process. Some accept the federal W-4; others have their own form. If you have remote workers in multiple states, you’ll need to track which state’s rules apply to each paycheck.
At year-end, wages and amounts withheld are reported to each employee on Form W-2 and summarized on Form W-3. The IRS matches those totals against your quarterly Form 941 deposits, and any mismatch triggers correspondence.10Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
Local Payroll Taxes
Depending on where you operate, cities, counties, or special districts may impose additional payroll-related taxes. Common examples include local earned income taxes, transit assessments, and local services taxes. Some are employer-paid, some are withheld from the employee, and some are split. Rates are usually modest but each brings its own filings and deadlines. Your state’s department of revenue is a good starting point when you’re figuring out what applies at a given work address.
None of This Applies to True Independent Contractors
Every tax above hinges on one question: is the worker an employee or an independent contractor? If they’re your employee, you owe everything described here. If they’re a legitimate independent contractor, you owe none of it. That gap is why misclassification is one of the areas the IRS looks at hardest.
The IRS weighs three categories of evidence in the classification test: whether you control how the work is done, whether you control the financial terms, and the nature of the ongoing relationship.11Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor decides it. The core question is whether you have the right to direct and control the worker.
If the IRS finds you misclassified an employee, you’ll owe back employment taxes at rates set by 26 USC 3509, plus your own share of FICA and FUTA, plus interest and possible penalties.12Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes When you’re not sure, either party can file Form SS-8 to ask the IRS for a determination.
When Deposits Are Due and What Late Costs
Knowing what you owe matters less than knowing when to send it. The IRS assigns employers to one of two deposit schedules for Social Security, Medicare, and withheld income taxes based on a lookback period covering the four quarters from July 1 through June 30 of the prior year.13Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
- Monthly depositor: total tax liability during the lookback period was $50,000 or less. Each month’s taxes are due by the 15th of the following month.
- Semiweekly depositor: lookback liability exceeded $50,000. Deposits are due within a few days of each payday on a Wednesday/Friday split.
New employers are monthly depositors for their first calendar year because their lookback liability is zero. One trap: if you accumulate $100,000 or more in liability on a single day, you must deposit by the next business day regardless of your normal schedule, and a monthly depositor who trips this rule gets moved to semiweekly for the rest of that year and the following year.13Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
Form 941 is due the last day of the month after each quarter ends: April 30, July 31, October 31, and January 31.14Internal Revenue Service. Instructions for Form 941 Form 940 is annual, generally due January 31, with an extra 10 days if every deposit during the year was on time.7Internal Revenue Service. Instructions for Form 940
Late-deposit penalties escalate quickly:
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5% of the unpaid deposit
- More than 15 days late: 10% of the unpaid deposit
- After an IRS notice demanding payment: 15% of the unpaid deposit
The tiers don’t stack. A deposit 10 days late owes 5%, not 2% plus 5%.15Internal Revenue Service. Failure to Deposit Penalty
The Trust Fund Recovery Penalty
The most serious payroll tax penalty targets people, not just companies. Withheld income tax and the employee’s share of Social Security and Medicare are “trust fund” taxes because the employer holds them for the government. When those funds aren’t turned over, the IRS can assess the Trust Fund Recovery Penalty against any person who was responsible for collecting and paying them and who willfully failed to do so.16Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
The penalty equals 100% of the unpaid trust fund taxes. A “responsible person” isn’t just the owner. It can reach officers, directors, shareholders, employees with check-signing authority, and even outside payroll providers who had the power to direct how the company’s money was spent.17Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP) The liability is personal. It survives the closing of the business and follows the individual through bankruptcy.