What Are an Employer’s Employment Tax Liabilities?

Employment taxes fund social programs that provide benefits to workers. These taxes encompass amounts employers must withhold from employee wages and contributions employers pay on behalf of their workforce. They support programs like Social Security, Medicare, and unemployment benefits.

Types of Employment Taxes

Federal employment taxes primarily consist of Social Security tax, Medicare tax, federal income tax withholding, and Federal Unemployment Tax Act (FUTA) tax.

Social Security tax, also known as Old-Age, Survivors, and Disability Insurance (OASDI), provides benefits for retirees, disabled individuals, and survivors of deceased workers. For 2025, the Social Security tax rate is 6.2% for both the employer and the employee, totaling 12.4%. This tax applies to wages up to an annual limit, which is $176,100 for 2025.

Medicare tax, or Hospital Insurance (HI), funds hospital insurance for the elderly and disabled. The Medicare tax rate is 1.45% for both the employer and the employee, resulting in a combined rate of 2.9%. Unlike Social Security tax, there is no wage base limit for Medicare tax. An additional Medicare tax of 0.9% applies to an individual’s wages exceeding $200,000 in a calendar year, though this extra tax is only withheld from the employee’s wages and has no employer match.

Federal income tax withholding is not an employer tax, but amounts deducted from an employee’s gross pay based on their Form W-4. Employers must withhold these amounts and remit them to the Internal Revenue Service (IRS) on the employee’s behalf.

The Federal Unemployment Tax Act (FUTA) tax is an employer-only tax that contributes to a federal fund supporting state unemployment benefits. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers can claim a credit of up to 5.4% against their FUTA tax liability for timely payments to state unemployment funds, effectively reducing the net federal rate to 0.6%.

State Unemployment Tax Act (SUTA) taxes are separate state-level unemployment taxes that employers pay to fund their respective state unemployment insurance programs. These state taxes interact with FUTA, as the FUTA credit is contingent upon employers paying their SUTA obligations. If a state has outstanding federal unemployment loans, employers in that state may face a reduced FUTA credit, leading to a higher effective FUTA tax rate.

Employer and Employee Responsibilities

Both employers and employees have responsibilities regarding employment taxes.

Employers must withhold federal income tax, Social Security, and Medicare taxes from employee wages. Employers must also pay their matching share of Social Security and Medicare taxes, which is equal to the employee’s portion. Employers are solely responsible for paying FUTA and SUTA taxes.

Employers must accurately report all collected and owed employment taxes to the appropriate tax authorities. They must also maintain payroll records for all employees, documenting wages paid, taxes withheld, and employer contributions.

Employees must provide accurate information on Form W-4, Employee’s Withholding Certificate, to their employer. This form dictates the amount of federal income tax to be withheld from their paychecks. The employee’s share of Social Security and Medicare taxes, along with their federal income tax, is directly deducted from their gross wages by the employer.

Calculating and Reporting Employment Taxes

Calculating and reporting employment taxes requires determining taxable wages and submitting forms to federal agencies.

Taxable wages are calculated from an employee’s gross pay, less any pre-tax deductions, such as retirement plan contributions or health insurance premiums. Income tax withholding is calculated using IRS guidance and the employee’s submitted Form W-4. Social Security and Medicare taxes are calculated using fixed percentages.

Form 941, Employer’s Quarterly Federal Tax Return, is filed by most employers each quarter to report wages paid, tips received, and the federal income, Social Security, and Medicare taxes withheld and paid. This form consolidates the employer’s and employee’s shares of these taxes.

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is filed annually to report the employer’s FUTA tax liability. Unlike Form 941, Form 940 focuses exclusively on federal unemployment taxes.

Annually, employers must also prepare Form W-2, Wage and Tax Statement, for each employee, summarizing their wages and taxes withheld for the year. A summary of all Forms W-2, Form W-3, Transmittal of Wage and Tax Statements, is then sent to the Social Security Administration.

Very small employers, with annual employment tax liabilities of $1,000 or less, may file Form 944, Employer’s Annual Federal Tax Return, annually instead of Form 941 quarterly.

Depositing and Paying Employment Taxes

Employment taxes must be remitted to the IRS. They are deposited throughout the year, rather than paid solely when a tax return is filed.

Employers determine their federal tax deposit schedule as either monthly or semi-weekly based on their tax liability during a “lookback period.” For Form 941 filers, the lookback period is the 12-month period ending on June 30 of the prior year. If the total tax reported during this period was $50,000 or less, the employer is a monthly depositor; if it exceeded $50,000, they are a semi-weekly depositor. Monthly depositors remit taxes by the 15th day of the following month, while semi-weekly depositors have more frequent deadlines.

A special rule, the “$100,000 next-day deposit rule,” applies if an employer accumulates $100,000 or more in tax liability on any single day, requiring deposit by the next business day regardless of their usual schedule.

Additionally, a de minimis rule allows employers to pay their total tax liability with a timely filed Form 941 if the amount for the current or preceding quarter is less than $2,500, and they did not incur a $100,000 next-day deposit obligation.

The Electronic Federal Tax Payment System (EFTPS) is the required method for most federal tax deposits. While federal taxes are remitted through EFTPS, state unemployment and withholding taxes have their own distinct payment systems and schedules, and employers must adhere to them separately.