Payroll tax rates are the percentages employers and employees must pay on wages to fund programs like Social Security and Medicare. When you run payroll, you withhold certain amounts from employee paychecks and add the employer share. These taxes are required by law and support federal programs that provide retirement, disability, and healthcare benefits. Payroll taxes are separate from income taxes and follow their own rates and rules. Think of them as the cost of participating in the social insurance system that covers nearly every worker in the United States.
How much do employers contribute to Social Security and Medicare taxes?
Payroll tax rates for Social Security and Medicare are split between the employer and the employee.
Tax Type | Employer Rate | Employee Rate | Total Rate | Wage Cap |
Social Security | 6.2% | 6.2% | 12.4% | Applies to first 168,600 dollars of wages in 2025 |
Medicare | 1.45% | 1.45% | 2.9% | No cap |
Employers typically pay 7.65% in combined Social Security and Medicare taxes on each employee’s wages. High earning employees may owe an additional Medicare surtax, but that amount comes from the employee only.
Are federal and state payroll tax rates different?
Yes. Federal payroll taxes for Social Security and Medicare are the same nationwide. Every employee and employer pays the same base rates. State payroll taxes vary significantly. Some states collect unemployment insurance, temporary disability contributions, or paid family leave taxes. Others do not. For instance, California and New York have multiple state payroll programs, while states like Texas or Florida keep payroll taxes minimal. Business location affects which state payroll taxes you owe and at what rate.
What payroll taxes do small business owners need to pay?
Small business owners with employees must pay several taxes each pay period.
Required Tax | Who Pays It | Purpose |
Social Security | Employer and employee | Funds retirement and disability benefits |
Medicare | Employer and employee | Funds healthcare for older adults |
FUTA | Employer | Funds federal unemployment insurance |
SUTA | Employer, sometimes employee | Funds state unemployment insurance |
State Specific Taxes | Varies | Covers benefits like paid leave or disability |
Small businesses must also withhold the employee’s share of federal and state income taxes along with Social Security and Medicare. These payments are submitted on a regular schedule, usually monthly or semiweekly depending on payroll size. If the owner has no employees and works independently, they pay self employment tax instead, which covers both the employer and employee share of Social Security and Medicare.
Do payroll tax rates change each year?
Some payroll tax rates change annually. The Social Security wage base typically increases to account for inflation. Medicare rates rarely change, although income thresholds for the additional Medicare tax may be updated. State payroll tax rules shift more frequently. Wage limits, contribution rates, and programs like unemployment or paid leave often change year to year. The best approach is to review IRS notices and state agency updates regularly or use a payroll provider that adjusts rates automatically.
Key Takeaways
Summary | |
Definition | Payroll tax rates determine how much employers and employees pay toward federal and state programs. |
Federal Rates | Social Security at 6.2% each and Medicare at 1.45% each. |
State Rates | Vary widely and may include unemployment or paid leave taxes. |
Small Business Obligations | Include employer payroll taxes and withholding employee taxes. |
Annual Changes | Social Security wage base often changes, and state rates shift regularly. |
FAQs
Do employers pay payroll taxes on bonuses?
Yes. Bonuses count as taxable wages and are subject to payroll taxes.
Are payroll taxes refundable?
No. Payroll taxes fund specific programs and are not refunded, although income tax refunds may affect your total tax bill.
Do nonprofits pay payroll taxes?
Yes. Most nonprofits must withhold and pay payroll taxes just like other employers.
