How to Calculate Employer Payroll Tax Expense

Employer payroll tax expense is an operational cost for a business, separate from the wages earned by employees. These taxes are levied directly on the employer and are not deducted from employee paychecks. Accurate calculation and budgeting for these tax obligations are required for financial health and compliance with federal and state regulations, as mismanagement can lead to penalties.

Identifying Employer Payroll Tax Components

FICA Taxes (Employer’s Share)

The Federal Insurance Contributions Act (FICA) mandates employer contributions to Social Security and Medicare. Employers must pay a matching share for each employee, meaning the amount paid by the employer is equal to the amount withheld from the employee’s paycheck. These funds support retirement, disability, and medical benefits for eligible individuals.

Federal Unemployment Tax (FUTA)

The Federal Unemployment Tax Act (FUTA) establishes a payroll tax paid only by employers. These funds assist states in administering their unemployment insurance and job service programs, providing benefits to workers who have been involuntarily terminated.

State Unemployment Tax (SUTA)

State Unemployment Tax Acts (SUTA), or State Unemployment Insurance (SUI), require employer contributions to a state-level unemployment fund that pays benefits directly to eligible unemployed workers. While similar to FUTA, SUTA is administered at the state level. SUTA is an employer-only tax in most states, but a few require a small employee contribution.

Information Needed for the Calculation

To calculate your payroll tax expense, you must first gather the total gross wages for each employee for the pay period. Gross wages include all compensation, such as salaries, hourly pay, bonuses, and commissions, before any deductions are taken.

You will also need the current tax rates and wage base limits for 2025. The employer Social Security tax rate is 6.2% on wages up to the annual limit of $176,100. The Medicare tax rate is 1.45% and applies to all of an employee’s wages without a limit.

The Federal Unemployment Tax Act (FUTA) rate is 6.0% on the first $7,000 of each employee’s annual wages. Employers who pay their state unemployment taxes on time receive a credit of 5.4%, which reduces the effective FUTA rate to 0.6%. This credit can be lower for employers in “credit reduction states,” which are states with outstanding federal unemployment loans. You must also obtain your company-specific State Unemployment Tax (SUTA) rate, which is assigned annually by your state’s workforce agency.

Step-by-Step Calculation Process

The following steps show how to calculate the total employer payroll tax expense. We will use an example of an employee who earned $2,000 in gross wages for a pay period and has not exceeded any annual wage limits.

First, calculate the employer’s share of Social Security tax. Multiply the employee’s gross wages for the period, up to the annual limit of $176,100, by the 6.2% tax rate. For our example employee, the calculation is $2,000 multiplied by 6.2%, resulting in a Social Security tax expense of $124.00.

Next, calculate the Medicare tax expense by multiplying the total gross wages by the 1.45% rate. Using the same example, the calculation is $2,000 multiplied by 1.45%, which equals a Medicare tax expense of $29.00.

Third, calculate the State Unemployment Tax (SUTA) expense. This uses the employee’s gross wages up to the state wage base limit and the company’s assigned SUTA rate. Assuming a state wage base of $9,000 and a company SUTA rate of 2.5%, the expense is calculated as $2,000 multiplied by 2.5%, resulting in a SUTA expense of $50.00.

Next, determine the Federal Unemployment Tax (FUTA) expense. The tax applies to the first $7,000 of wages. Using the net FUTA rate of 0.6%, the calculation for the example employee is $2,000 multiplied by 0.6%, which equals a FUTA expense of $12.00.

Finally, determine the total employer payroll tax expense by summing the results from the previous steps. In our example, this is $124.00 (Social Security) + $29.00 (Medicare) + $50.00 (SUTA) + $12.00 (FUTA). The total payroll tax expense to record for this employee is $215.00.

Recording Payroll Tax Expense

After calculating the total payroll tax expense, you must record it in your company’s general ledger. A journal entry officially recognizes the expense in the accounting period it was incurred. This entry also establishes the corresponding liabilities on the balance sheet, representing the amounts owed to government agencies.

The journal entry involves a debit to the Payroll Tax Expense account for the total calculated amount. Corresponding credits are made to separate payable accounts for each type of tax, which itemizes the liabilities. For instance, you would credit Social Security Tax Payable, Medicare Tax Payable, FUTA Tax Payable, and SUTA Tax Payable for their respective amounts.

Using the total expense of $215.00 from our example, the journal entry would show a debit of $215.00 to Payroll Tax Expense. The credits would be $124.00 to Social Security Tax Payable, $29.00 to Medicare Tax Payable, $50.00 to SUTA Tax Payable, and $12.00 to FUTA Tax Payable. These payable accounts are cleared when the taxes are paid.