Employer Payroll Taxes: What It Means for Employers

What it means in practice

Every time a business runs payroll, two kinds of tax are in play. Some are taken out of the employee's pay and passed on to the government. Others come out of the employer's own pocket on top of the wages. The IRS puts it this way: some federal employment taxes "are paid by both the employer and the employee, while others are paid by the employer." This entry covers the second group.

Employer-paid versus withheld taxes. IRS Publication 15 (2026) says most employers must "withhold (except FUTA), deposit, report, and pay" four federal employment taxes: income tax, Social Security tax, Medicare tax and FUTA tax. Federal income tax is withheld from the employee only (see federal income tax withholding). Social Security and Medicare tax are split: the employer withholds the employee share and pays a matching employer share. FUTA is employer-only. The difference matters because Publication 15 calls the withheld amounts "trust fund taxes": they are part of the employee's wages that the employer pays to the Treasury instead of to the employee. The employer shares of FICA and FUTA are not withheld from anyone; they are the employer's own tax.

1. Employer share of Social Security tax. For 2026 the IRS lists the Social Security rate as 6.2% for the employer and 6.2% for the employee, or 12.4% in total, on wages up to the $184,500 wage base limit (Topic 751). Once an employee's wages for the year pass the wage base, neither the employee share nor the employer share is due on the rest of that year's wages. The employee-side rules, including what happens when a worker has two employers, are covered under Social Security tax.

2. Employer share of Medicare tax. The employer pays 1.45% of all covered wages, matching the employee's 1.45%, for a combined 2.9%, and the IRS states there is no wage base limit for Medicare tax. The 0.9% Additional Medicare Tax that employers must withhold once an employee's wages pass $200,000 in a calendar year is different: Publication 15 says it "is only imposed on the employee" and there is no employer share. For which pay counts toward Medicare wages, see Medicare wages and tips; for the combined picture, see FICA.

3. FUTA tax. Publication 15 says "Only the employer pays FUTA tax; it isn't withheld from the employee's wages," and the IRS adds that employers pay it "only from your own funds." For 2026 the rate is 6.0% on the first $7,000 paid to each employee as wages during the year. The credit for state unemployment contributions can be as much as 5.4%, bringing the rate after credit to 0.6%, but only if state unemployment taxes were paid in full, on time and on all the same wages, and the state is not a credit reduction state. DOL notes that at 0.6% the maximum FUTA tax is $42.00 per employee per year. The liability tests, exempt payments and credit reduction rules are explained under FUTA.

4. State unemployment insurance tax. DOL describes unemployment insurance as "a federal-state program jointly financed through Federal and state employer payroll taxes," and says state law determines each state's tax rates. State taxable wage bases can differ from the $7,000 federal base, and Publication 15 notes some states exclude wages from state unemployment tax that FUTA still taxes, such as wages paid to corporate officers. Experience rating, new employer rates and voluntary contributions are covered under state unemployment tax (SUTA).

5. Other state and local employer taxes. Some states and localities levy additional taxes on employers. California is one example: its Employment Development Department (EDD) says there are four state payroll taxes, two "paid by employers" (Unemployment Insurance and the Employment Training Tax) and two "withheld from employee wages" (State Disability Insurance and Personal Income Tax). New York is another: the Metropolitan Commuter Transportation Mobility Tax (MCTMT) is imposed on certain employers doing business in the 12-county Metropolitan Commuter Transportation District. Details for both are in the state section below.

Who is covered. These taxes attach to wages paid to employees. Publication 15 says part-time workers and workers hired for short periods are treated the same as full-time employees for Social Security, Medicare and FUTA purposes. Payments to an independent contractor are not wages, and Publication 15 lists payments to general or limited partners as exempt from Social Security, Medicare and FUTA tax. S corporation payments to an officer or shareholder must be treated as wages to the extent they are reasonable compensation for services, and those wages are taxable for Social Security, Medicare and FUTA.

Where FICA and FUTA part ways. The employer taxes do not always apply to the same people. Under Publication 15, wages paid to one spouse working in the other spouse's trade or business are subject to Social Security and Medicare taxes but not FUTA tax. Pay to a child under 18 working in a parent's sole proprietorship (or a partnership in which each partner is a parent) is exempt from Social Security and Medicare, and pay to a child under 21 working for a parent is exempt from FUTA. These family exemptions do not apply when the employer is a corporation, most partnerships or an estate. The Form 940 instructions add that organizations described in section 501(c)(3) and exempt under section 501(a) generally are not subject to FUTA tax, and Publication 15 says payments to state and local government employees are generally not subject to FUTA tax, although many are subject to Social Security and Medicare.

Pay that is exempt from employer taxes. Publication 15 lists employer contributions to a qualified retirement plan as exempt from Social Security, Medicare and FUTA tax. Employee elective deferrals to a 401(k) plan are generally exempt from income tax withholding but taxable for Social Security, Medicare and FUTA, so the employer still pays its share on them. The Form 940 instructions list other payments that may be exempt from FUTA, including contributions to accident or health plans, benefits excluded under a section 125 cafeteria plan, dependent care payments up to $5,000 per employee and workers' compensation payments.

How it works for an employer, step by step. (1) Each payday, figure the employer shares of Social Security and Medicare on the same wages as the employee shares, stopping Social Security at the wage base. (2) Track each employee's FUTA wages up to $7,000 and each state's wage base. (3) Deposit the employer FICA together with the withheld taxes, and deposit FUTA quarterly once the liability is over $500; the schedules are explained under federal tax deposits. (4) Report employer and employee FICA on Form 941, which Publication 15 lists as due quarterly by April 30, July 31, October 31 and January 31. (5) Report FUTA annually on Form 940; IRS Topic 759 gives the due date as January 31, or February 10 if all FUTA tax was deposited when due. (6) Pay state taxes on the state's own schedule; California EDD says UI and ETT payments are due every quarter. Until paid, all of these sit on the books as payroll liabilities.

Example 1: annual employer cost for one employee (illustration). An employee earns $50,000 in 2026 in a state that is not a credit reduction state, and the employer paid its state unemployment tax on time. Employer Social Security is 6.2% x $50,000 = $3,100. Employer Medicare is 1.45% x $50,000 = $725. FUTA is 0.6% x $7,000 = $42. The federal employer total is $3,867, before any state taxes. The employee separately bears $3,825 of withheld Social Security and Medicare (the same two percentages), plus income tax withholding.

Example 2: a high earner (illustration). An employee earns $250,000 in 2026. Employer Social Security stops at the wage base: 6.2% x $184,500 = $11,439. Employer Medicare applies to all of it: 1.45% x $250,000 = $3,625. Additional Medicare Tax of 0.9% on the $50,000 above $200,000 is $450, but that is withheld from the employee and the employer pays no share. With $42 of FUTA, the employer's federal cost is $15,106.

Example 3: adding California employer taxes (illustration). EDD states that new employers are assigned a 3.4% UI rate for two to three years, that the 2026 ETT rate is 0.1%, and that the UI and ETT taxable wage limit is $7,000 per employee per calendar year. For the employee in Example 1 at a new California employer, that adds $238 of UI (3.4% x $7,000) and $7 of ETT (0.1% x $7,000). The 2026 SDI rate of 1.3% is withheld from the employee, so it is not an employer cost. California employers should also check whether California is a credit reduction state for the year, which would raise the FUTA figure.

Where states differ: two examples. Examples only; every state differs. California: besides the figures above, EDD lists the 2026 UI rate schedule (Schedule F+) as running from 1.5% to 6.2%, and has already published 2027 figures: Schedule F+ again, ETT of 0.1% and an SDI withholding rate of 1.4%. New York: the Department of Taxation and Finance says an employer is subject to the MCTMT if it must withhold New York State income tax and has more than $312,500 of payroll expense for covered employees in the district in any calendar quarter. For quarters beginning on or after July 1, 2025, rates in Zone 1 (the five New York City counties) run from 0.055% to 0.895% and in Zone 2 (Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess and Westchester) from 0.055% to 0.635%, depending on payroll expense in the zone. In the department's example, $450,000 of Zone 1 and $200,000 of Zone 2 payroll expense produce $2,810 ([$450,000 x 0.60%] + [$200,000 x 0.055%]). Returns are due quarterly on April 30, July 31, October 31 and January 31, and the department says no extensions are allowed.

If the employer pays the employee's share too. Publication 15 says that if an employer pays an employee's Social Security and Medicare taxes without deducting them from pay, the payment is added to the employee's wages for those taxes, and that increase is itself taxed, which "again increases the amount of the additional taxes that you must pay." See gross-up.

Misclassified workers. If an employer treated an employee as a nonemployee and did not withhold, Publication 15 says it will generally be liable for Social Security and Medicare taxes and withheld income tax, and it "continue[s] to owe the full employer share" even when special section 3509 rates apply to the employee share. If the required information returns were filed, the section 3509 rates are 7.44% of wages for Social Security and 1.74% for Medicare; if not, 8.68% and 2.03%.

Recordkeeping. Publication 15 says to keep all employment tax records for at least 4 years, including amounts and dates of wage payments and the dates and amounts of tax deposits. Keep the Form 940 line 10 worksheet with your records if you used it; the instructions say not to attach it.

Question: Is the employer share ever withheld from the employee? No. The employer share of FICA and all of FUTA come from the employer's funds. The IRS says employees do not pay FUTA "or have it withheld from their pay."

Question: If a payroll company handles everything, who owes the tax? Publication 15 says the employer is responsible for making sure returns are filed and deposits made even if it contracts with a third party, and remains responsible if that third party fails to act. See payroll service.

Question: Do state taxes count toward the FUTA credit? Only state unemployment contributions do. The Form 940 instructions say not to count special administrative taxes, voluntary contributions paid to get a lower rate, surcharges, or employment and training taxes, and not to count unemployment taxes deducted from employees' pay.

This entry summarizes federal rules and two state examples as of October 2026; confirm current rates with the IRS and your state agencies.

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