Small business payroll taxes: What employers actually pay
Learn which employer payroll taxes you owe, the 2026 rates, and how to calculate, deposit, and file them on time.
Written by Kari Brummond—Content Writer, Accountant, IRS Enrolled Agent. Read Kari's full bio
Published Friday 6 November 2026
Table of contents
Key takeaways
- You pay the employer share of Social Security and Medicare taxes, plus federal and state unemployment tax, and sometimes local payroll taxes.
- You must also withhold the employee share of Social Security, Medicare, and income taxes from each paycheck and remit them to the government.
- Social Security is 6.2% on wages up to $184,500 in 2026 ($192,300 in 2027), and Medicare is 1.45% on all wages. The effective federal unemployment tax (FUTA) rate is typically 0.6% on the first $7,000 per employee.
- Federal payroll tax deposits are due semi-weekly, monthly, or annually, while returns are generally due quarterly.
What are employer payroll taxes?
Employer payroll taxes are the taxes a business owes based on employee wages, separate from any amounts withheld from employee paychecks. These taxes fund programs like Social Security, Medicare, and unemployment insurance.
As an employer, you're responsible for paying these taxes from your own funds. They include:
- The employer's share of Federal Insurance Contributions Act (FICA) taxes, covering Social Security and Medicare
- Federal unemployment taxes
- State unemployment taxes
- Any other employer taxes required under state or local law
The IRS provides guidance on understanding employment taxes, and Publication 15 (Circular E) offers extensive detail.
Payroll tax vs income tax
Payroll taxes and income taxes both come out of employee wages, but they work differently. Payroll taxes are flat-rate taxes on wages that fund specific programs, including Social Security, Medicare, and unemployment insurance. Income tax is a progressive tax on all income sources that funds general government operations.
As an employer, you share the cost of payroll taxes with your employees. You don't share the cost of income tax, but you're responsible for withholding it from employee paychecks and remitting it to the IRS and applicable state agencies.
2026 employer payroll tax rates at a glance
Here's a quick summary of what you owe as an employer in 2026:
- Social Security: 6.2% on wages up to $184,500 in 2026 ($192,300 in 2027)
- Medicare: 1.45% on all wages (no cap)
- FUTA: 6% on the first $7,000 per employee, typically reduced to 0.6% after state credits
- State Unemployment Tax Act (SUTA): varies by state, industry, and claims history
Now that you know the basic payroll tax rates, let's look at each type in more detail and whether you pay or withhold them.
What taxes do employers pay or withhold?
In addition to paying taxes, you must also withhold taxes from employee paychecks and send those amounts to the government. You don't pay these withheld taxes out of your own funds, but you're responsible for making the payments on behalf of your employees and filing reports with the government.
Social Security
Wages are subject to a 12.4% Social Security tax. You withhold 6.2% from employee pay and then pay a matching amount from your own funds.
For example, if you pay an employee $1,000, you withhold $62 from their paycheck and remit it to the IRS. At the same time, you also make a matching $62 payment.
As of 2026, this tax only applies to wages up to $184,500. The cap is tied to inflation and increases annually. The Social Security Administration has set the wage base at $192,300 for 2027.
Medicare
Medicare tax is 2.9% of all earned income. You withhold half (1.45%) from the employee's pay and pay the other half. For example, if you pay an employee $1,000, you withhold $14.50 from their paycheck and remit it to the IRS. You also make a matching $14.50 payment from your own funds.
Unlike Social Security, Medicare tax applies to all earned income with no cap. There's also an additional Medicare tax of 0.9% that applies to earnings over a certain threshold based on filing status, but only employees pay this tax, not employers.
FUTA basics and credits
You pay federal unemployment tax to fund state unemployment programs. The tax is 6% of the first $7,000 in wages paid to each employee. You pay this tax from your own funds; you don't withhold it from employee pay.
Employers in most states qualify for a credit of up to 5.4%, which reduces the effective rate to 0.6%. However, if you're in a credit reduction state, the credit will be lower and you'll pay a higher rate. Credit reduction states are states that owe the federal government money. The US Department of Labor releases an updated list every year.
SUTA rates and experience ratings
All states require employers to pay state unemployment tax as well. In most states, only employers pay this tax; a few states, such as Alaska, New Jersey, and Pennsylvania, also require a small employee contribution. Typically, payments are due quarterly, but that may vary by state.
Like the federal unemployment tax, state unemployment taxes are based on the first portion of employee wages. For example, in California, unemployment taxes apply to the first $7,000 of employee wages. In New York, they apply to the first $17,600.
The rate varies based on the state, industry, age of the business, and unemployment claims made by your employees. Most states start employers on an introductory rate and then adjust it down with experience or up in response to unemployment claims.
Other state employment taxes
Many states require additional taxes on top of state unemployment premiums. For example, some states have taxes to cover paid family leave, sick leave, or disability insurance. You're exclusively responsible for paying some state taxes, while employees are responsible for others.
In all cases, you're typically responsible for withholding taxes as needed from employee paychecks, remitting payments to the state, and filing tax returns.
Local payroll taxes
Local employment taxes vary significantly and only apply in certain cities or counties. They may include taxes paid by employees, taxes paid by employers, or both. Check with your city or county government to find out if you need to pay or withhold these taxes and which reports you need to file.
How to calculate and pay employer payroll taxes
How much do you actually pay in payroll taxes? Ideally, you use software because calculating by hand is time-consuming and error-prone. Here's the process, step by step.
1. Determine taxable wages and employer rates
As of 2026, you must pay employment taxes on the following wages:
- Social Security: 6.2% on wages up to $184,500 in 2026 ($192,300 in 2027)
- Medicare: 1.45% on all wages
- FUTA: 6% on the first $7,000 of wages per employee, minus up to 5.4% state credit
- SUTA: variable threshold at variable rates
Keep in mind, this only covers the payroll tax rate you pay as an employer. It doesn't include taxes paid by employees and withheld from their paychecks.
Worked example: employer payroll tax on a $60,000 salary
Here's how to estimate your employer payroll tax cost for one employee earning $60,000 per year:
- Social Security (6.2%): $60,000 x 0.062 = $3,720
- Medicare (1.45%): $60,000 x 0.0145 = $870
- FUTA (0.6% effective rate): $7,000 x 0.006 = $42
- Estimated total employer cost: approximately $4,632 per year, before SUTA
State unemployment tax would add to this total, depending on your state's rate and wage base. The exact amount varies, so check with your state unemployment insurance agency for current rates.
2. Figure out your deposit schedule
Your deposit schedule depends on how much employment tax you reported during a lookback period, and new employers are generally monthly depositors. You may need to make deposits semi-weekly, monthly, or potentially annually. Federal tax deposits must be made electronically. You can pay through the Electronic Federal Tax Payment System (EFTPS) or by using payroll software that handles electronic payments.
Calculate FUTA taxes quarterly and make a quarterly deposit once the total due exceeds $500. Otherwise, you can pay once a year.
State and local due dates and deposit requirements vary. Check with your state department of revenue and your local government to learn more. The IRS also provides a guide on depositing and reporting payroll taxes.
3. File your payroll tax returns
With payroll taxes, you pay the tax and file the returns separately. Here are the forms you must file with their due dates:
- Form 941 (quarterly): due by the last day of the month following each quarter: April 30, July 31, October 31, and January 31.
- Form 944 (annual): if the IRS notifies you in writing to file Form 944, file it once a year instead of quarterly Form 941. The 2026 Form 944 is due February 1, 2027.
- Form 940 (annual): the FUTA return, generally due January 31; the 2026 Form 940 is due February 1, 2027, because January 31 falls on a Sunday.
Penalties for late payroll tax deposits or filings
The IRS takes payroll tax compliance seriously, and penalties for late deposits or filings can add up fast. Here's what to watch for:
- Late deposit penalties: range from 2% to 15% of the unpaid tax, depending on how many days late the deposit is.
- Late filing penalties: the IRS charges 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%.
- Trust fund recovery penalty: if you fail to collect, account for, or deposit withheld taxes, the IRS can personally assess the penalty against responsible individuals in your business.
The best way to avoid these penalties is to stay on schedule with your deposits and filings. Payroll software can help by automating reminders and payments. For the full penalty schedule, see the IRS penalties overview.
How software automates employer payroll taxes
Software makes running payroll straightforward. Here's how most online payroll services work.
Set up employees
Enter employee names, tax identification numbers, and contact details, as well as:
- Pay rates: hourly rate or annual salary
- Paid time off: for example, if an employee earns one hour of sick pay for every 40 hours worked
- Withholding information: details from the employee's W-4 form, showing filing status, dependents, and other factors that affect income tax withholding
Enter hours and calculate employee pay
You can enter employee hours manually based on timesheets or time clock records. Or you can automate entries by using payroll software with time tracking or by syncing your payroll software with your time clock.
Then, let the software calculate gross pay, taxes, and take-home pay. To pay employees, you'll either set up direct deposit or print checks; some payroll software handles check printing for you.
Connect bank accounts and set up taxes
You need to connect your bank account to the software if you want to pay employees through direct deposit and automate tax payments. Some payroll apps require a connected bank account, while others just calculate the numbers and let you pay employees or taxes manually.
If you want the software to pay your payroll taxes, you'll also need to connect your tax accounts. Most apps use a straightforward process, but it may involve entering tax account numbers into the software and then confirming access in your state or federal tax accounts.
Sync payroll to accounting
Sync your payroll software to your accounting software. Then, every time you run payroll, the software automatically updates your accounting records.
You can control how you want the information recorded. Typically, wages and taxes withheld from employee pay are classified as wage expenses, while employer payroll taxes are considered a tax expense.
Compliance reminders and audit trail
Using payroll software creates a clear audit trail. You can show auditors employee payments, taxes withheld, employer taxes paid, and how you calculated your payroll tax rates.
Set up automatic software updates for changes to minimum wage, unemployment tax rates, or other requirements. Or make updates manually when the law changes.
Simplify employer payroll taxes with Xero
Payroll taxes are complex, but the right tools can make them manageable. Xero Payroll, powered by Gusto, helps you calculate and file payroll taxes and keep your accounting records up to date. Direct deposit and multi-state payroll are included, and automatic updates help you stay compliant in every state, so you spend less time on admin and more time on your business.
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FAQs on employer payroll taxes
Here are some common questions about employer payroll tax obligations.
Do employers pay FICA?
Yes, employers pay half of Federal Insurance Contributions Act (FICA) taxes, and employees pay the other half. Each side pays 6.2% for Social Security and 1.45% for Medicare.
Which payroll taxes are paid by employers only?
Federal unemployment tax is paid entirely by employers, as is state unemployment tax in most states (Alaska, New Jersey, and Pennsylvania also collect a small employee contribution). Some states also require employer-only contributions for programs like disability insurance or paid family leave.
How much does payroll cost an employer beyond wages?
FICA taxes (7.65%) plus federal and state unemployment taxes make up your core employer payroll tax costs, with the final percentage depending on your state's unemployment rate and wage base. If you also offer benefits like health insurance, retirement contributions, and paid time off, total employer compensation costs can add significantly more.
How do you handle multi-state employees?
You'll still pay FICA directly to the IRS, but you'll need to register for a withholding account in each state where you have employees who are subject to income tax. You'll also deal with each state separately for state unemployment tax, filing returns and making payments in every state where you have workers.
Which wages are exempt from FUTA?
Section 501(c)(3) nonprofit organizations don't pay FUTA on employee wages, and payments for certain services performed by clergy members are also exempt. The IRS provides a full list of FUTA exemptions in Publication 15-A.