Employers must pay three federal payroll taxes from their own funds: (1) Social Security at 6.2% on wages up to $176,100 per employee; (2) Medicare at 1.45% on all wages with no cap; and (3) the Federal Unemployment Tax (FUTA) at an effective rate of 0.6% on the first $7,000 of each employee's wages per year. Employers do not match the Additional Medicare Tax of 0.9%. Employers also withhold and remit the employee share of FICA and federal income tax, but those amounts are collected from the employee's wages. All federal payroll taxes are deposited electronically through EFTPS and reported on Form 941 (quarterly) and Form 940 (annual).
- The employer FICA rate is 6.2% Social Security plus 1.45% Medicare, totaling 7.65% on wages within the Social Security wage base of $176,100.
- Employers do not match the 0.9% Additional Medicare Tax. That rate applies to the employee only on wages above $200,000.
- FUTA is an employer-only tax. The gross rate is 6% on the first $7,000 per employee, reduced to an effective 0.6% after the standard state unemployment tax credit.
- The payroll tax deposit schedule is monthly or semi-weekly, determined by the employer's lookback period tax total. New employers start on the monthly schedule.
- The Trust Fund Recovery Penalty can impose 100% personal liability on responsible individuals when trust fund taxes go unpaid, even after a business closes.
What Taxes Does an Employer Pay?
Employer payroll taxes fall into two categories. The first is taxes the employer pays from its own funds. The second is taxes the employer withholds from employee wages and remits on their behalf.
The table below separates these two categories using 2025 IRS rates.
| Tax | Who Bears the Cost | Rate (2025) | Wage Limit |
|---|---|---|---|
| Social Security (employer share) | Employer | 6.2% | $176,100 |
| Medicare (employer share) | Employer | 1.45% | None |
| FUTA (Federal Unemployment) | Employer | 0.6% effective | First $7,000/employee |
| SUTA (State Unemployment) | Employer (most states) | Varies by state | Varies by state |
| Social Security (employee share) | Employee (withheld by employer) | 6.2% | $176,100 |
| Medicare (employee share) | Employee (withheld by employer) | 1.45% | None |
| Additional Medicare Tax | Employee only (withheld when wages exceed $200,000) | 0.9% | Wages above $200,000 |
| Federal Income Tax Withholding | Employee (withheld by employer) | Varies by W-4 | None |
The employer's direct cost obligation is rows 1 through 4. Rows 5 through 8 represent amounts collected from employees and remitted to the IRS. The employer is legally responsible for timely collection and remittance of all of these, but the economic cost of rows 5 through 8 falls on the employee.
FICA Employer Match: How It Works
Under the Federal Insurance Contributions Act, employers must match the employee's Social Security and Medicare contributions. For every dollar of Social Security withheld from an employee's paycheck, the employer pays an additional dollar from its own funds.
Social Security (6.2%)
The employer Social Security rate is 6.2% on wages up to $176,100 per employee per calendar year for 2025. When an employee's cumulative wages from that employer cross $176,100, Social Security withholding stops for the year. The employer's matching obligation also stops at the same point. Wages above the base are not subject to Social Security tax from either the employee or the employer.
Medicare (1.45%)
The employer Medicare rate is 1.45% on all covered wages with no cap. There is no wage limit for Medicare. An employee earning $500,000 generates $7,250 in employer Medicare tax for the year.
Additional Medicare Tax (0.9%): Employer Does Not Match
When an employee's wages from a single employer exceed $200,000 in a calendar year, the employer must withhold an additional 0.9% Medicare tax on the excess. This additional amount is an employee-only obligation. The employer withholds it but does not pay a matching 0.9%. The employer's Medicare cost remains at 1.45% on all wages regardless of the employee's total compensation.
For employers, the combined FICA cost is 7.65% on wages within the Social Security wage base, and 1.45% on wages above it.
FUTA: Federal Unemployment Tax
FUTA is an employer-only tax. Employees do not pay it and it does not appear on a pay stub.
Rate and Wage Base
The gross FUTA rate is 6% on the first $7,000 of each employee's wages per calendar year. Most employers qualify for a credit of up to 5.4% for timely payment of state unemployment taxes. That credit reduces the effective federal FUTA rate to 0.6%. The maximum FUTA cost per employee per year at the effective rate is $42. If SUTA is paid after the Form 940 filing deadline, the IRS limits the credit to 90% of the otherwise-allowable amount. On the maximum 5.4% credit, this reduces the credit to 4.86% and raises the effective FUTA rate to 1.14%. Source: IRS Instructions for Form 940 (2025), credit worksheet.
| Component | Amount |
|---|---|
| FUTA wage base per employee | $7,000 |
| Gross FUTA rate | 6.0% |
| Standard state credit (SUTA paid on time) | 5.4% |
| Effective FUTA rate after credit | 0.6% |
| Maximum FUTA per employee per year | $42.00 |
Credit Reduction States
A state that has borrowed from the federal unemployment trust fund and not repaid the loan within the required period becomes a credit reduction state. Employers in those states receive a reduced SUTA credit for FUTA purposes. The IRS updates this list annually.
For tax year 2025 (Form 940 filed in early 2026): California (1.2% credit reduction, effective FUTA rate 1.8%) and the U.S. Virgin Islands (4.5% credit reduction, effective FUTA rate 5.1%). Connecticut and New York repaid their outstanding federal advances before the November 10, 2025 deadline and are not subject to credit reduction for TY2025 or TY2026.
For tax year 2026 (projected): California's credit reduction is projected at 1.5%, raising its effective FUTA rate to 2.1%. The U.S. Virgin Islands' projected effective rate is 5.4%. California employers should budget for the higher rate rather than assuming the standard 0.6%. Projections are subject to change based on loan repayment status before the annual November deadline.
Do not assume the standard 0.6% effective rate applies without confirming your state's status. Before filing Form 940, verify the current year's credit reduction states on Schedule A (Form 940) instructions for that specific tax year. Source: IRS FUTA Credit Reductions; Federal Register Notice 2026-00342.
FUTA Deposits
FUTA taxes are not deposited with each payroll. They accumulate by quarter. If the cumulative FUTA liability for a quarter exceeds $500, it must be deposited by the last day of the month following the end of that quarter. If the cumulative FUTA liability never exceeds $500 during the year, it can be paid with the Form 940 annual return instead of deposited separately.
State Unemployment Tax (SUTA)
Every state administers its own unemployment insurance program. Employers pay state unemployment tax (SUTA) on employee wages up to the state's wage base, which varies by state and is separate from the federal $7,000 FUTA wage base.
SUTA is an employer-only tax in most states. Alaska, New Jersey, and Pennsylvania are examples of states that also collect a small employee SUTA contribution. In all other states, SUTA falls entirely on the employer.
SUTA rates are experience-rated. A new employer pays a standard new-employer rate, which varies by state. As the employer accumulates a claims history, the state adjusts the rate based on how frequently former employees have filed for unemployment benefits. Employers with low turnover and few claims pay lower rates over time.
SUTA is not reported on any federal form. It is filed separately with each state's workforce development or labor department on a state-specific quarterly form.
Payroll Tax Deposit Schedules
Federal payroll taxes must be deposited electronically using EFTPS (Electronic Federal Tax Payment System). Deposit frequency depends on the employer's lookback period tax liability.
Lookback Period
The lookback period is the 12-month period ending June 30 of the prior year. For 2025, the lookback period is July 1, 2023 through June 30, 2024. The IRS totals the employer's Form 941 tax liabilities from that period to determine the deposit schedule for the current year.
Monthly Depositor
Lookback period taxes of $50,000 or less qualify the employer as a monthly depositor. All taxes for a calendar month must be deposited by the 15th of the following month. If the 15th falls on a weekend or legal holiday, the deadline shifts to the next business day.
Semi-Weekly Depositor
Lookback period taxes exceeding $50,000 require a semi-weekly deposit schedule. The timing depends on the payday:
- Wednesday, Thursday, or Friday paydays: deposit by the following Wednesday
- Saturday, Sunday, Monday, or Tuesday paydays: deposit by the following Friday
The $100,000 Next-Day Rule
If an employer's accumulated payroll tax liability reaches $100,000 or more on any single day during a deposit period, the deposit is due by the close of the next banking day. This rule applies to all employers regardless of their regular deposit schedule. Triggering it even once immediately and permanently converts a monthly depositor to a semi-weekly depositor for the remainder of the current calendar year and the entire following calendar year. This conversion is non-discretionary. An employer who continues depositing on a monthly basis after triggering this rule faces failure-to-deposit penalties on every payroll deposit for up to nearly 24 months — the maximum exposure if the rule is triggered early in the calendar year. The failure-to-deposit penalty begins at 2% for deposits 1 to 5 days late and reaches 15% for amounts still undeposited 10 or more days after the IRS issues a first delinquency notice.
New Employers
New employers have no lookback period tax history. Their lookback period tax total is treated as zero, which falls below the $50,000 monthly threshold. All new employers begin on the monthly deposit schedule. The $100,000 next-day rule applies from day one.
For the exact quarterly Form 941 filing dates and Form 940 annual deadline, see the Payroll Tax Deadlines guide, which covers all federal payroll filing dates for 2025 including the calendar adjustments when deadlines fall on weekends.
Form 941: Quarterly Payroll Tax Filing
Form 941, the Employer's Quarterly Federal Tax Return, is the primary form employers use to report payroll tax obligations to the IRS. It covers four taxes: federal income tax withheld from employee wages, the employee share of Social Security, the employee share of Medicare, and the employer share of Social Security and Medicare.
Form 941 is due the last day of the month following the end of each quarter. It reconciles the deposits already made during the quarter against the total tax due. If deposits exceeded the tax owed, the employer can claim a refund or apply the credit to the next quarter. If deposits fell short, the remaining balance is owed with the return.
Who Does Not File Form 941
Not all employers file Form 941. Farm employers use Form 943 instead. Household employers who employ domestic workers in their homes do not file Form 941. They report household employment taxes on Schedule H, attached to their personal Form 1040. Seasonal employers may also qualify to skip Form 941 for quarters in which no wages were paid.
Form 940: Annual FUTA Return
Form 940, the Employer's Annual Federal Unemployment Tax Return, is filed once per year. It reports the total FUTA wages paid during the year, the FUTA deposits made, and the net FUTA tax liability. Any FUTA tax owed after deposits is paid with the return.
For employers in credit reduction states, Form 940 includes Schedule A, which calculates the additional FUTA tax owed due to the reduced state credit. Check IRS Schedule A each year to confirm whether any state where the employer paid wages is subject to credit reduction for that tax year.
See the full paycheck breakdown including employer-side FICA using the hourly or salary calculators.
The Trust Fund Recovery Penalty
Trust fund taxes are the amounts withheld from employees that belong to the government: federal income tax withheld, the employee share of Social Security, and the employee share of Medicare. These are held "in trust" by the employer until remitted to the IRS.
When a business fails to remit trust fund taxes, the IRS can pursue the Trust Fund Recovery Penalty (TFRP) under IRC Section 6672. The TFRP equals 100% of the unpaid trust fund amount. It is not a penalty in the usual sense. It is a collection mechanism designed to recover the full tax from responsible individuals.
Who Is Responsible
The TFRP can be assessed against any person who had the authority and responsibility to ensure trust fund taxes were paid. This includes owners, officers, comptrollers, bookkeepers, and any other person with signatory authority over the business's bank accounts. Responsibility is a facts-and-circumstances determination. Title alone does not determine liability.
More than one person can be jointly and severally liable. The IRS can collect the full amount from any one of them. Once the full amount is collected from any source, the remaining liable parties are released from the obligation.
The Penalty Survives Business Closure
The TFRP can be assessed even after the business has closed, dissolved, or declared bankruptcy. The IRS assesses it personally against the responsible individuals.
A common misconception is that operating through an LLC or corporation provides protection from this liability. It does not — but only for trust fund taxes specifically. The TFRP reaches only the amounts the employer withheld from employees and failed to remit: federal income tax withheld, the employee's share of Social Security, and the employee's share of Medicare. These are not the employer's money. They belong to the government the moment they are withheld from a paycheck. Failing to remit them triggers personal liability regardless of the business entity type.
The employer's own share of FICA and FUTA are not trust fund taxes. They are employer-assessed taxes. The IRS collects unpaid employer-assessed payroll taxes through tax liens and levies against the business entity itself, where entity-type protections may apply in the normal course. The distinction matters: money taken from employees cannot be shielded by entity structure. Money the employer owed as its own tax obligation can be. Source: IRC Section 6672; IRS Publication 15, Section 11.
Real-World Example: Total Employer Cost for One Employee
This example shows the full employer payroll tax cost for a single employee earning $52,000 per year in a state that is not a credit reduction state.
| Component | Calculation | Annual Employer Cost |
|---|---|---|
| Annual wages | $52,000 | $52,000.00 |
| Employer Social Security (6.2%) | $52,000 × 6.2% | $3,224.00 |
| Employer Medicare (1.45%) | $52,000 × 1.45% | $754.00 |
| FUTA (0.6% on first $7,000) | $7,000 × 0.6% | $42.00 |
| Total FICA + FUTA obligation | $4,020.00 | |
| True employer labor cost (wages + FICA + FUTA) | $56,020.00 |
This does not include state unemployment tax (SUTA), workers' compensation insurance, or employer-paid benefits. Those amounts vary by state and employer. For a 2025 salary of $52,000, this employer tax burden is approximately $4,020, an effective additional cost of 7.73% of the gross wage. This is not a fixed rate. It is salary-dependent and decreases as wages rise. FUTA applies only to the first $7,000 of wages per employee, so its percentage cost is higher for lower-wage workers and approaches zero for higher earners. For wages above the 2025 Social Security wage base of $176,100, the employer's FICA obligation drops from 7.65% to 1.45% because Social Security stops applying. The 2026 Social Security wage base is $184,500. Employers with employees who earn above these thresholds will see their effective payroll tax rate decrease mid-year once the threshold is crossed. Budget using the actual dollar amounts for each employee rather than applying a single percentage to total payroll.
At LMN Tax Inc, the most common employer payroll error we see is not a rate error. It is a deposit timing error. Monthly depositors miss the 15th-of-the-month deadline because they treat payroll tax deposits like an annual or quarterly task. The failure-to-deposit penalty starts at 2% for deposits that are 1 to 5 days late. It reaches 10% for deposits more than 15 days overdue. An employer paying $10,000 per month in payroll taxes who is consistently 2 weeks late pays $1,000 in avoidable penalties per month. The fix is a calendar reminder or an automatic EFTPS deposit scheduled the same day payroll runs.
When This May Not Apply
- Independent contractors (1099 workers): Employers have no FICA, FUTA, or withholding obligations for workers properly classified as independent contractors. The contractor pays self-employment tax on their own. Misclassifying employees as contractors is an IRS and DOL audit area with significant retroactive liability.
- Household employers: Individuals who employ nannies, housekeepers, or other domestic workers in their homes follow the household employer rules. Schedule H is filed with Form 1040 rather than Form 941. The FICA rates are the same, but the reporting and deposit rules differ. See IRS Publication 926.
- Agricultural employers: Employers of farm laborers use Form 943 instead of Form 941. Special rules apply to seasonal agricultural workers under the H-2A visa program. See IRS Publication 51.
- S-Corp owner-employees: A shareholder-employee of an S-Corp must receive reasonable compensation as W-2 wages subject to FICA. Distributions above reasonable compensation are not subject to payroll taxes. There is no bright-line threshold for what constitutes reasonable compensation, and IRS scrutiny is common in S-Corp audits.
- Credit reduction states: Employers in states with outstanding federal unemployment loans pay a higher effective FUTA rate. Check Schedule A of Form 940 instructions each year before filing. The list changes annually.
Frequently Asked Questions
Understanding employer payroll tax obligations starts with knowing the rates. From there, deposit timing is the most critical operational compliance item. Missing deposit deadlines triggers avoidable penalties. Use the Payroll Tax Deadlines guide for the exact 2025 deposit and filing dates, quarterly Form 941 due dates, and the Form 940 annual deadline.
To estimate the true cost of adding a new employee, including employer FICA match, FUTA, and your state SUTA rate, use the Payroll Tax Calculator. It calculates total annual employment cost, per-period employer taxes, and effective employer tax rate for any wage level. For employee take-home estimates, use the Paycheck Calculator or Hourly Paycheck Calculator.
- IRS Publication 15 (Employer's Tax Guide), 2025
- IRS Publication 15-T (Federal Income Tax Withholding Methods), 2025
- IRS Instructions for Form 940 (FUTA), 2025
- IRS Instructions for Form 941 (Quarterly), 2025
- IRS Topic 751: Social Security and Medicare Withholding Rates
- IRS: Understanding Employment Taxes
- IRS: Trust Fund Recovery Penalty