Employers have many responsibilities to their workforce. Some, such as stock options or commuter stipends, are optional perks to attract top talent and improve job satisfaction. Others, like payroll taxes, are mandatory liabilities closely regulated by federal and state tax authorities.
How much payroll tax are employers obligated to contribute in the U.S.? Unfortunately, there is no simple answer. Factors like employment status, gross pay, and local regulations all impact how businesses calculate payroll taxes.
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What Are Payroll Taxes?
Payroll taxes are mandatory contributions that fund Social Security, Medicare, and unemployment insurance. Both employees and employers pay these taxes as a fixed percentage of wages.
Unlike state and federal income taxes, which are used to fund a broad range of government services, payroll taxes are specifically earmarked for these programs. Social Security and Medicare taxes are deducted directly from employees' paychecks, and employers contribute an equivalent amount. Unemployment insurance taxes fall solely on employers.
State and federal income taxes are also automatically withheld from regular employees' gross wages based on the withholding preferences provided on their W-4 forms. Withholding income taxes from regular paychecks ensures workers' income tax payments are spread throughout the year rather than paid in a large lump sum at tax filing time. Individuals are responsible for calculating taxes on extra income streams (e.g., investment payouts, rental properties, or independent contractor work).
What Payroll Taxes Do Employers Pay?
Employers are responsible for matching and paying several different payroll taxes every time they issue a paycheck to an employee. Here's a payroll breakdown:
Social Security Tax
Social Security tax is a federal payroll tax that funds retirement, disability, and survivor benefits under the Federal Insurance Contributions Act (FICA). According to the IRS, the current tax rate for Social Security is 6.2% of an employee's gross wages for both the employee and employer. Employees also pay this percentage, which employers withhold from their paychecks and deposit on their behalf.
Medicare Tax
Medicare tax is another FICA tax that employers and employees pay out equally. It provides health insurance for individuals aged 65 or older and those with certain disabilities. The current Medicare tax rate for employers is 1.45% of every employee's gross wage, and unlike Social Security, there is no wage base limit, so all covered wages are subject to the tax. Employees are responsible for the same tax rate, which payroll automatically withholds each pay period.
Employees who earn more than $200,000 must pay additional Medicare tax. A 0.9% tax rate is applied, although it varies depending on specific thresholds—$250,000 for joint filers, $125,000 for married people who file separately, and $200,000 for other filers. Employers do not match the additional Medicare tax, but they are responsible for withholding the 0.9% tax from an employee's wages that exceed $200,000 in a calendar year.
Federal Unemployment Tax
Federal unemployment tax (also referred to as FUTA tax) helps fund unemployment benefits at the federal level. Unlike FICA taxes, federal unemployment taxes are solely the employer's responsibility. As the IRS states, employers must pay a 6% FUTA tax that applies to the first $7,000 of each employee's annual wages. Many organizations are eligible for tax credits of 5.4% on federal unemployment tax, which can reduce their FUTA liability to 0.6%.
State Unemployment Tax
State unemployment taxes (aka SUTA taxes) provide unemployment benefits at the state level. Tax rates and wage limits vary from state to state and can also be impacted by an individual employer's history of unemployment claims. Payroll must check with each state where they employ workers to calculate the correct SUTA tax.
How Much Do Employers Pay in Total Payroll Taxes?
So, what's the bottom line cost? Your baseline starts with FICA taxes at 7.65% of employee wages (6.2% for Social Security up to the annual limit and 1.45% for Medicare with no limit).
On top of that, you have federal and state unemployment taxes. The effective Federal Unemployment Tax Act (FUTA) rate is typically 0.6% on the first $7,000 of an employee's wages. State Unemployment Tax Act (SUTA) rates are the biggest variable, changing by state and your company's claims history.
Here's what it means for your budget: most employers pay between 8% and 15% of an employee's gross pay in total payroll taxes. The wide range comes down to your state's unemployment tax rate and claims history.
Steps to Calculate Payroll Taxes
Need to build out best practices to accurately calculate payroll taxes each pay period? Here's an easy six-step process:
1. Update Employee Information
Start by reviewing and updating your employees' gross pay, including base salary, overtime, bonuses, and any other compensation. Exact compensation figures are crucial since they determine the amount of payroll taxes due.
Ensure that you properly categorize every worker. Employers are responsible for regular employees' tax withholdings, but freelancers and independent contractors handle their own federal tax returns, including Medicare tax, Social Security tax, and self-employment tax.
2. Estimate the Projected Income Tax Withholding
Use employees' up-to-date W-4 forms to estimate federal and state income tax withholdings. An employee's filing status, number of dependents, and additional withholding amounts will impact your calculations.
Although employees aren't required to fill out a new W-4 every tax year, an annual review ensures that life changes like marriage, divorce, or parenthood are reflected in withholdings.
3. Add Tax Credits
The IRS and state tax authorities offer several tax credits and adjustments that may reduce the amount of tax withheld. This may include credits for retirement contributions or health savings accounts.
Tax credits can result in major savings, potentially lowering employees' total tax liability and increasing their take-home pay.
4. Determine the Payroll Tax Contributions
Calculate each employee's required contributions, applying the correct payroll tax rates to their gross wages. Be sure to account for mandatory federal payroll taxes (Social Security, Medicare, and federal unemployment tax), state liabilities, and voluntary payroll deductions.
5. Calculate the Withholding Amount
Combine all calculated amounts and subtract from the employee's gross pay. This will determine each employee's net pay, which is the amount they receive after all the deductions.
6. Pay Using the Electronic Federal Tax Payment System
Organizations pay federal payroll taxes online using the Electronic Federal Tax Payment System. Federal payroll taxes are paid as soon as they're withheld from wages. Depending on your pay period, you may deposit withholdings for payroll taxes alongside your own tax contributions.
Consequences of a Late Federal Tax Payment
Here's the reality: the IRS doesn't negotiate on payroll tax deadlines. Miss a payment, and you're facing "Failure to Deposit" penalties based on how late you are.
Currently, the IRS charges the following "failure to deposit" penalties:
- A 2% penalty of your total deposit will be applied for payments deposited 1-5 calendar days late
- A 5% Failure to Deposit Penalty of your total deposit will be applied for payments deposited 6-15 calendar days late
- A 10% penalty of your total deposit will be applied for payments deposited more than 15 calendar days late
- A 15% penalty of your total deposit will be applied for payments deposited more than 10 calendar days after your first notice
Oyster Offers Expert Support for Payroll Taxes
Payroll is likely one of your largest expenses. With deposits due every single month, inaccurate systems and manual processes can weigh down your bottom line—and put you at risk of significant penalties. Professional payroll services automate the entire process so you can focus on your organization's goals.
Try out Oyster's global payroll services today. Our employment platform ensures international compliance in more than 180 countries worldwide.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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