One of the first common payroll questions I get is: What is payroll tax, and what does it cover? Put simply, these are the taxes employers must withhold and pay based on employee wages. These taxes are sent to government agencies and generally include Social Security, Medicare, and unemployment taxes.
For business owners, understanding the full scope of employer payroll taxes matters because payroll taxes aren’t limited to employee paycheck deductions. Employers also pay certain payroll taxes themselves, which directly affects labor costs, compliance, and payroll planning.
What payroll taxes fund & who pays them
To better understand what payroll taxes are, it helps to look at where the money goes. Payroll taxes are used to fund Social Security, Medicare, and unemployment insurance programs, which provide retirement income, healthcare coverage, and temporary financial support for workers when they need it most.
Both employers and employees contribute to payroll taxes, but the share each pays depends on the type of tax.
| Payroll tax | Employer | Employee |
|---|---|---|
| Social Security | 6.2% | 6.2% |
| Medicare | 1.45% | 1.45% |
| Federal unemployment | 0.6% to 6.0% | 0% |
| State unemployment | Varies by state | Varies (in limited states only) |
As an employer, you’re responsible for withholding the correct tax amounts from employee wages and paying your share of those taxes.
Employer payroll taxes include Social Security and Medicare, also known as Federal Insurance Contributions Act (FICA) taxes. As of this writing, Social Security tax is 6.2% of wages, and Medicare tax is 1.45%, for a combined rate of 7.65%.
Additionally, employers are responsible for State Unemployment Tax Act (SUTA) and Federal Unemployment Tax Act (FUTA) taxes, which fund state and federal unemployment programs. FUTA is paid only by the employer and is not deducted from employee wages. Meanwhile, SUTA is generally employer-paid, although a few states require employee contributions.
Similar to employers, workers contribute to Social Security and Medicare through payroll tax deductions. The rates are identical to those paid by the employers: 6.2% for Social Security and 1.45% for Medicare.
Some employees may owe an additional Medicare tax of 0.9% once their earnings exceed a certain threshold. Employers don’t match this amount, but they’re still responsible for withholding and remitting it.
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Certain types of employees are exempt from payroll taxes, like students employed by their school, certain family employees, and some agricultural workers. These exemptions are determined on a case-by-case basis, so it’s important to review IRS rules carefully.
Types of Payroll Taxes
Payroll taxes fall into a few main categories, each with its own rules and responsibilities for employers. Understanding how these taxes differ helps you stay compliant and better estimate your total payroll costs.
Social Security tax
This is one of the primary payroll taxes, and is shared between employers and employees. Each party pays a flat rate on wages up to a certain limit, which is typically adjusted each year.
For 2026, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee, or 12.4% total. This is applied to wages up to $184,500. Once an employee’s wages exceed that limit, the tax no longer applies for the rest of the calendar year.
Medicare tax
Medicare tax is another core payroll tax shared between employers and employees. Both pay 1.45% of all covered wages. Unlike the Social Security tax, there is no wage limit, which means the Medicare tax applies to all earnings regardless of income level.
Some employees may also owe an Additional Medicare Tax of 0.9% once their wages exceed $200,000 for the calendar year. Employers are required to withhold this additional amount, but they don’t match it.
Unemployment Taxes
Unemployment taxes help fund programs that provide temporary income to workers who lose their jobs through no fault of their own. There are two types:
Unlike Social Security and Medicare taxes, FUTA is not deducted from employee wages. It’s paid entirely by employers.
The FUTA tax rate is 6.0% on the first $7,000 paid to each employee annually. However, employers can claim a credit of up to 5.4% for SUTA taxes paid, reducing the effective FUTA rate to as low as 0.6%. If your business is in a state that fulfills federal guidelines, you’ll likely pay the lower rate.
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Timing matters here. Late SUTA payments can cost you the FUTA credit entirely. Pay your state unemployment taxes on time, or you lose the discount.
SUTA, also known as state unemployment insurance (SUI) tax, varies depending on where your business is located and the industry it belongs to. Every state runs its own unemployment insurance program, with its own rates and wage bases.
The tax rate you’ll pay as an employer generally depends on your history of unemployment claims. New businesses are usually assigned a standard “new employer” rate. After a few years, the SUTA rate may be adjusted based on the number of former employees who’ve claimed unemployment benefits.
In most states, this tax is paid only by the employer, although a few (like Alaska, New Jersey, and Pennsylvania) require employee contributions. Check your state’s labor department for the exact rate and taxable wage base.
Self-Employment Taxes
If you’re self-employed, you’re responsible for both the employer and employee shares of Social Security and Medicare taxes. Instead of splitting these taxes with an employer, you pay both portions yourself.
The total self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. For 2026, the Social Security portion follows the annual wage base of $184,500, while an additional 0.9% Medicare tax may apply to income above the threshold.
Note that you can deduct the employer payroll taxes portion when calculating the adjusted gross income on your federal income tax return. This can help offset the cost of the self-employment tax.
For more information about this tax’s payment and reporting requirements, read our self–employment tax guide.
Payroll tax vs. income tax: What’s the difference?
It’s common to confuse payroll taxes with income taxes, especially since both can be withheld from employee paychecks. However, they are calculated differently and involve different responsibilities for employers.
- Payroll taxes: These are based on wages paid through payroll and may require both employer contributions and employee withholdings, depending on the type of tax.
- Income taxes: These are based on an individual’s total taxable income and filing status. While employers withhold these taxes, they do not contribute to them.
For employers, the key distinction is responsibility. Payroll taxes involve both withholding and direct employer payments, while income taxes primarily involve withholding and remittance on behalf of employees.
Frequently asked questions (FAQs)
Is payroll tax deductible?
Yes. The employer portion of payroll taxes is deductible as a business expense on your federal income tax return. This includes employer-paid Social Security and Medicare taxes, as well as federal and state unemployment taxes. However, the employee portion of payroll taxes, which is withheld from employee paychecks, is not deductible by the employer.
How often do I need to deposit payroll taxes?
The frequency of your payroll tax deposits depends on your IRS deposit schedule and the size of your payroll. Some employers deposit monthly, while others follow a semiweekly schedule. Because deposit timing varies, it’s best to check the current IRS rules or work with a payroll provider or tax professional to avoid penalties.
What happens if I don’t pay payroll taxes?
Failing to pay payroll taxes can lead to penalties, interest, and potentially serious legal consequences. Employers may also be held personally liable for certain unpaid payroll taxes, such as amounts withheld from employee wages but not remitted to the government.
Can I outsource payroll tax responsibilities?
Absolutely. Many businesses choose to outsource their payroll and payroll tax duties to third-party providers. These providers can handle everything from wage calculation and paycheck distribution to tax withholding and filing. Outsourcing can be a cost-effective way to ensure compliance and accuracy in your payroll processes.
