Definition

Payroll tax is the set of taxes an employer withholds from employee wages or pays on top of them: federal income tax withholding, Social Security and Medicare taxes, and unemployment taxes. The employer calculates, deposits and reports these amounts to federal, state and local agencies on a fixed schedule.

Also known as: payroll taxes, employment taxes, employment tax

Key figures

United States (federal)As of Oct 13, 2026

Social Security tax
6.2% employee + 6.2% employerIRS Topic 751
Medicare tax
1.45% employee + 1.45% employerIRS Topic 751
Social Security wage base (2026)
$184,500 a yearIRS Publication 15 (2026)
Additional Medicare Tax
0.9% on wages over $200,000IRS Topic 751
Federal unemployment tax (FUTA, 2026)
6.0% on the first $7,000 per employeeIRS Publication 15 (2026)
FUTA after the state credit
0.6% (credit up to 5.4%)IRS Publication 15 (2026)

How it works

Each payday the employer withholds federal income tax based on the employee's Form W-4. It also withholds the employee's Social Security tax of 6.2 percent and Medicare tax of 1.45 percent, and pays the same amounts again as the employer's share. Social Security stops once an employee's 2026 wages reach $184,500; Medicare has no cap. Above $200,000 of wages in a year, the employer also withholds a 0.9 percent Additional Medicare Tax, with no employer match.

Federal unemployment tax (FUTA) comes only from the employer: 6.0 percent of the first $7,000 paid to each employee, cut to 0.6 percent after the credit for state unemployment taxes paid in full. States add their own unemployment tax, and many add income tax withholding.

Federal deposits are made electronically on a monthly or semiweekly schedule. Most employers report on Form 941 each quarter and on Form 940 and Form W-2 each year. Payroll software and payroll services calculate, deposit and file these taxes, which is where most payroll errors and penalties are avoided.

Example

A design studio pays an employee $5,000 for the month and withholds income tax from the W-4, plus $310 of Social Security and $72.50 of Medicare, and pays another $382.50 as the employer's share. It also owes FUTA on the first $7,000 of the employee's pay for the year, then deposits everything electronically and reports it on Form 941.

How it differs from similar terms

Payroll Tax vs Independent Contractor. Employers withhold and pay payroll taxes for employees, but generally not for independent contractors, who pay their own taxes. Treating an employee as a contractor can leave the employer owing the payroll taxes it did not withhold.

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Frequently asked questions

What taxes are included in payroll taxes?

Federal income tax withholding, Social Security tax, Medicare tax, the Additional Medicare Tax on high earners, federal unemployment tax (FUTA), and the state and local equivalents. Some come out of the employee's pay, some are paid by the employer, and Social Security and Medicare are split between both.

What percentage is payroll tax?

For Social Security and Medicare, 7.65 percent from the employee and 7.65 percent from the employer: 6.2 percent plus 1.45 percent each. Income tax withholding varies by employee, and FUTA is 0.6 percent of the first $7,000 for most employers after the state credit.

How much are employer payroll taxes?

The employer matches 6.2 percent for Social Security and 1.45 percent for Medicare, and pays FUTA of 6.0 percent on the first $7,000 per employee, usually 0.6 percent after the state credit. State unemployment tax comes on top, at a rate set by each state.

Is there a cap on Social Security tax?

Yes. For 2026, Social Security tax applies only to the first $184,500 of an employee's wages. Medicare has no cap, and wages above $200,000 add the 0.9 percent Additional Medicare Tax, withheld from the employee only.

Which payroll taxes do employees pay and which do employers pay?

Employees pay income tax withholding, their half of Social Security and Medicare, and any Additional Medicare Tax. Employers pay the matching half of Social Security and Medicare, plus FUTA, which is never withheld from pay. Most state unemployment taxes are also employer-paid.

How do employers deposit and report payroll taxes?

Federal deposits go by electronic funds transfer, for example through EFTPS, on a monthly or semiweekly schedule that depends on the size of past tax bills. Most employers file Form 941 every quarter, and Form 940 and Form W-2 every year.

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