What Is Payroll Tax? What Employers Pay and Why It Matters
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.
Key takeaways
- Both the employer and the employee pay some payroll taxes
- Employers are responsible for calculating, withholding, paying, and remitting all payroll taxes
- Accurate reporting and timely payments help avoid penalties
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.
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.
Let’s say you employ Jane, who earns $200,000 annually. You withhold and match Social Security tax rates only on the first $184,500 of her wages. To calculate this, use:
$184,500 × 6.2% (or 0.062) = $11,439
That’s $11,439 each from you and Jane, for a combined $22,878 in Social Security taxes on her earnings for 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.
Using Jane’s example above, you deduct and match the Medicare Tax from her $200,000 annual income. Because her wages do not exceed the threshold, the Additional Medicare Tax would not apply. Here’s how to compute this:
$200,000 × 1.45% (or 0.0145) = $2,900
For Medicare tax, you and Jane will contribute $2,900 each, or a combined amount of $5,800 for the calendar year.
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:
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.
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.
Self-employment tax is generally calculated based on your net earnings from self-employment. If your annual net earnings, or your business income minus expenses, are $100,000, your self-employment tax would be $15,300. This is computed as:
$100,000 × 15.3% (or 0.153) = $15,300
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)
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.
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.
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.
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.
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