Employer tax refers to the taxes a business must pay on behalf of its employees, separate from the income tax withheld from workers’ paychecks. These taxes fund Social Security, Medicare, and unemployment insurance programs. For most employers, the combined cost adds roughly 7.65% or more on top of every dollar of wages paid, before factoring in unemployment taxes and other mandatory contributions.
Social Security and Medicare Taxes
The largest employer tax obligation comes from FICA, which stands for the Federal Insurance Contributions Act. FICA is split into two parts: Social Security tax and Medicare tax. The total FICA rate is 15.3% of each employee’s wages, but employers and employees split the cost evenly, each paying 7.65%.
Breaking that down, the employer’s share consists of 6.2% for Social Security and 1.45% for Medicare. So if you pay an employee $60,000 a year, your FICA obligation on that salary is $4,590. The employee pays the same amount through paycheck withholding.
Social Security tax only applies up to a certain earnings threshold. In 2026, that cap is $184,500. Once an employee’s wages exceed that amount in a calendar year, you stop paying the 6.2% Social Security portion on additional earnings. Medicare tax, on the other hand, has no cap. You owe 1.45% on every dollar of wages regardless of how much an employee earns. There is also a 0.9% Additional Medicare Tax on earnings above $200,000 for single filers ($250,000 for joint filers), but only the employee pays that surtax. It does not add to the employer’s cost.
Federal Unemployment Tax (FUTA)
Employers also pay federal unemployment tax, known as FUTA, which funds the unemployment insurance system. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s annual wages. That $7,000 wage base has not changed since 1983.
In practice, most employers pay far less than the full 6.0%. If you pay your state unemployment taxes on time, you receive a credit of up to 5.4%, which brings the effective FUTA rate down to 0.6%. On a per-employee basis, that works out to a maximum of $42 per year per employee. You report and pay FUTA taxes annually using IRS Form 940.
State Unemployment Tax (SUTA)
Every state runs its own unemployment insurance program, funded primarily by taxes on employers. The rate you pay depends on several factors, including your industry, the size of your payroll, and your claims history (how many former employees have filed for unemployment benefits). New businesses typically start at a default rate, which adjusts over time based on experience.
State unemployment tax wage bases vary widely. States are required to set their taxable wage base at or above the federal minimum of $7,000, but most set it significantly higher. About 28 states use a flexible wage base that can increase each year, often indexed to average wages or tied to the health of the state’s unemployment trust fund. In a few states, employees also contribute a small amount toward unemployment insurance alongside the employer.
How Employer Taxes Get Reported
The IRS requires employers to report and deposit employment taxes on a regular schedule. The two forms you’ll deal with most often are:
- Form 941: Filed quarterly, this form reports the Social Security tax, Medicare tax, and federal income tax you withheld from employee paychecks, along with your matching employer share of FICA. Very small employers (those with $1,000 or less in annual payroll tax liability) may qualify to file Form 944 once a year instead.
- Form 940: Filed annually, this form reports your federal unemployment tax obligation.
You also need to issue a W-2 to each employee by January 31 of the following year, summarizing their total wages and the taxes withheld. Copies go to the Social Security Administration as well.
How often you deposit the taxes depends on the size of your payroll. Smaller employers deposit monthly, while larger employers deposit on a semiweekly schedule. Late deposits trigger penalties and interest, so most businesses use payroll software or a payroll service to handle the timing automatically.
Other Mandatory Employer Costs
Beyond payroll taxes, employers face additional mandatory costs that are sometimes lumped under the broad label of “employer taxes,” even though they are technically insurance premiums rather than taxes. Workers’ compensation insurance is the most common example. Nearly every state requires employers to carry it, and the cost varies based on industry risk, claims history, and state rules. A desk-job employer pays a fraction of what a construction company pays per dollar of payroll.
The U.S. Small Business Administration notes that all payroll taxes and mandatory insurance costs are fully tax deductible as business expenses, which offsets a portion of the total burden.
What Employer Tax Costs in Total
To get a realistic picture, add up the employer’s share of Social Security (6.2%), Medicare (1.45%), FUTA (typically 0.6% on the first $7,000), and your state unemployment rate. For an employee earning $50,000, the math looks roughly like this:
- Social Security: $3,100
- Medicare: $725
- FUTA: $42
- State unemployment: Varies, but could range from a few hundred to over a thousand dollars depending on your rate and the state’s wage base
That puts the employer tax cost somewhere around $4,000 to $5,000 on a $50,000 salary, or roughly 8% to 10% on top of wages. Add workers’ compensation insurance and any other mandatory contributions, and the total cost of employing someone consistently exceeds their gross pay by a meaningful margin. This is why financial planning for a new hire should always account for more than just the salary number on the offer letter.