Overview

Payroll taxes fund core social insurance programs (Social Security and Medicare) and fund federal and sometimes state unemployment programs. In the U.S., most payroll taxes are split between the employee (through paycheck withholding) and the employer (through an employer-paid portion). Employers are responsible for withholding the employee share, depositing combined amounts on a schedule, reporting totals on payroll tax returns, and issuing wage statements (Form W-2) at year end (IRS: Publication 15).

Which payroll taxes are split and how

  • Social Security (OASDI): An employee’s wages are generally subject to a Social Security tax and the employer must match that amount. The tax is a percentage of wages up to the annual Social Security wage base, which is adjusted each year by the Social Security Administration (see IRS/SSA for current wage-base limits).
  • Medicare (Hospital Insurance): Medicare tax is also split: employees have 1.45% withheld and employers pay an equal 1.45% on the same wages. High earners pay an Additional Medicare Tax (0.9%) that applies to wages above specific filing thresholds; that additional 0.9% is withheld from the employee only — employers do not match it (IRS: Additional Medicare Tax).
  • Federal and state unemployment taxes (FUTA and SUTA): These are employer-paid taxes in most cases and are not withheld from employee paychecks. State rules and rates vary; employers should consult their state workforce/tax agency.

How allocation works in practice (simple example)

To illustrate the split without relying on year-specific wage bases: imagine an employee earns $50,000 in wages.

  • Social Security: The employee’s portion is 6.2% of taxable wages (with a matching 6.2% by the employer) up to the annual wage base limit. For $50,000, the withheld employee Social Security would be 6.2% × $50,000 = $3,100 and the employer would also pay $3,100.
  • Medicare: The employee pays 1.45% = $725 and the employer pays the same $725.
  • Total employer tax cost (for these items) includes both the employer match on Social Security and Medicare ($3,825 in this example) plus employer-only taxes such as FUTA/SUTA that are not shown on the employee’s pay stub.

Because the Social Security wage base changes annually, employers should reference SSA/IRS guidance each year to know when employee wages stop being subject to the OASDI tax.

Independent contractors and self-employment

Self-employed people (1099 contractors) do not have an employer who withholds payroll taxes. Instead, they pay self-employment tax, which covers both the employee and employer shares of Social Security and Medicare. The self-employment tax rate combines the two halves (the OASDI and Medicare portions) and is computed on net self-employment earnings; a portion of the self-employment tax is deductible when calculating adjusted gross income (IRS: Self-Employment Tax).

Key employer responsibilities

  • Withholding: Employers must withhold the correct employee share of Social Security and Medicare from wages. They must also withhold federal income tax per the employee’s Form W-4 and any applicable state/local taxes (IRS: Publication 15).
  • Depositing: Employers must deposit withheld taxes plus the employer share on schedules that depend on deposit frequency and total tax liabilities (e.g., monthly or semiweekly deposits). The IRS provides a deposit schedule and electronic filing systems (EFTPS).
  • Reporting: Employers report wages and tax withholdings on quarterly returns (Form 941 or annually on Form 944 for eligible employers) and issue Form W-2 to employees and the Social Security Administration at year-end.
  • Recordkeeping: Maintain payroll records, wage statements, tax deposits, and copies of filed returns for the period required by law.

Employee impact and take-home pay

Payroll taxes directly reduce employees’ net pay. Understanding payroll tax allocation helps employees estimate take-home pay and future benefits. For example, while Social Security deductions lower current cash flow, they generate future credits toward retirement and disability benefits under Social Security. Employees should also be aware of the Additional Medicare Tax if their wages — combined with other earnings — exceed the applicable thresholds.

Common mistakes and compliance risks

  • Misclassifying workers: Treating an employee as an independent contractor to avoid employer payroll taxes is a common and risky mistake. Correct classification affects who is responsible for payroll taxes; see our checklist on correct classification (FinHelp: Correct Classification of Workers).
  • Failing to deposit on time: Late deposits trigger penalties and interest from the IRS.
  • Not withholding Additional Medicare Tax: Employers must withhold the additional 0.9% Medicare tax when wages paid to an employee exceed $200,000 in a calendar year, regardless of filing status (employees reconcile at filing if thresholds differ by filing status).
  • Ignoring state payroll rules: State unemployment taxes, withholding requirements, and wage bases vary by state.

Practical strategies for employers and payroll managers

  1. Use payroll software or a reputable payroll processor. Automation reduces calculation errors, ensures timely deposits, and helps with filing Forms 941/944 and W-2. 2. Reconcile payroll liabilities monthly. Comparing payroll registers to bank deposits and payroll tax returns prevents surprises. 3. Review worker classifications periodically and keep documentation — misclassification audits are a frequent audit trigger (FinHelp: Correct Classification of Workers). 4. Budget total labor cost, not just gross wages. Employers must account for the employer share of payroll taxes and any benefit-related payroll taxes when pricing labor.

When employees should check their withholding

Employees should review withholding and take-home pay when they experience life changes (marriage, birth of a child, side income) or when they reach income levels where Additional Medicare Tax may apply. Adjusting the Form W-4 or coordinating estimated tax payments (if you have non-wage income) helps avoid year-end tax shortfalls. For help estimating withholding, consult the IRS Tax Withholding Estimator on IRS.gov.

Correcting errors and navigating penalties

If an employer discovers under-withheld or unpaid payroll taxes, act quickly:

  • Amend returns and deposit amounts as required. Employers should consult IRS guidance for correcting Forms 941 and adjusting deposits.
  • Consider voluntary disclosure and penalty relief requests if the mistake was in good faith. The IRS sometimes grants penalty abatements for reasonable cause.
  • If you’re an employee and discover missing withholding, speak to your employer promptly. If unresolved, you may need to make estimated tax payments or consult a tax professional.

How this affects small business owners and gig workers

Small business owners must plan for both the cash-flow timing of payroll tax deposits and the total annual payroll tax burden. For gig workers and independent contractors, remember that self-employment tax effectively includes both the employee and employer shares — but self-employed filers can deduct half of the self-employment tax when computing adjusted gross income (IRS: Self-Employment Tax).

Professional tips from practice

  • In my work advising small businesses, I’ve seen the easiest compliance wins come from (a) automating payroll, (b) scheduling a monthly payroll tax reconciliation, and (c) documenting worker classification decisions. These steps reduce audit risk and unexpected tax bills. – When hiring employees who will be paid at high wage levels, build the employer payroll tax match and potential FUTA/SUTA costs into hiring budgets.

Further reading and related FinHelp resources

  • For guidance on classifying workers correctly, see Correct Classification of Workers: Checklists and Evidence (FinHelp).
  • If you’re self-employed, our Self-Employment Taxes: Calculating SE Tax and Deductions explains how self-employment tax replaces employer/employee splits and identifies deductible portions (FinHelp).
  • Employers should review Payroll Taxes for Employers: Withholding, Deposits, and Forms for step-by-step employer obligations and deposit schedules (FinHelp).

Sources and authoritative references

Professional disclaimer

This article is educational and not individualized tax advice. Payroll and tax situations can vary by state, industry, and individual facts. Consult a qualified tax professional or payroll specialist for guidance tailored to your circumstances.