What Is ER Tax? A Breakdown of Employer Tax Duties

“ER tax,” or employer tax, refers to the various taxes businesses are obligated to pay or withhold from their employees’ wages. These taxes fund government programs and services. Compliance with these tax requirements is a responsibility for employers.

Key Federal Employer Taxes

Employers in the United States are responsible for federal taxes that support national programs. The primary federal employer taxes include those under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).

Federal Insurance Contributions Act (FICA)

Federal Insurance Contributions Act (FICA) taxes encompass Social Security and Medicare taxes. Social Security tax is designated for retirement, disability, and survivor benefits, while Medicare tax contributes to hospital insurance. For 2025, both employers and employees each pay 6.2% for Social Security and 1.45% for Medicare, totaling 7.65% each.

The Social Security portion of FICA has a wage base limit. For 2025, the Social Security wage base limit is $176,100. Wages earned above this limit are not subject to this tax. In contrast, there is no wage base limit for Medicare tax, so all covered wages are subject to the 1.45% Medicare tax. An additional 0.9% Medicare Tax applies to an employee’s wages exceeding $200,000 for single filers, $250,000 for joint filers, or $125,000 for married individuals filing separately; this additional tax is solely the employee’s responsibility and is withheld by the employer.

Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) tax funds unemployment benefits for workers who have lost their jobs. Unlike FICA taxes, FUTA tax is paid solely by the employer and is not withheld from employee wages. The standard FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers can receive a credit of up to 5.4% for timely payments made to state unemployment tax programs, effectively reducing the net federal rate to 0.6%.

State and Local Employer Taxes

Beyond federal requirements, employers also navigate state and, in some cases, local taxes. These taxes vary by jurisdiction, reflecting diverse state-specific needs. Employers must understand the obligations in each state where they operate or have employees.

State Unemployment Tax Act (SUTA)

State Unemployment Tax Act (SUTA) taxes, also known as State Unemployment Insurance (SUI), are the state-level counterparts to FUTA. These taxes fund unemployment benefits for eligible workers and are paid by the employer. The SUTA tax rate for an employer is influenced by an “experience rating,” determined by the number of former employees who claimed unemployment benefits. Employers with fewer claims typically have lower SUTA tax rates. Each state sets its own SUTA tax rate, wage base limit, and rules.

State Income Tax Withholding

Most states require employers to withhold state income tax from employee wages. Employers are responsible for deducting the correct amount from paychecks and remitting it to the state tax authority. The amount to withhold depends on the employee’s income, filing status, and exemptions, in accordance with state tax rates and regulations.

Other State and Local Payroll Taxes

Some states or local jurisdictions may levy additional payroll taxes. These can include state disability insurance contributions or specific local wage taxes. The existence and rates of these taxes depend on the business’s location and its employees. Employers must verify all applicable state and local tax requirements.

Employer Obligations for Tax Compliance

Employers have specific responsibilities to ensure compliance with federal, state, and local employer tax laws. Fulfilling these obligations involves obtaining necessary identifiers, accurately withholding and depositing taxes, and diligently reporting and maintaining records.

Employer Identification Number (EIN)

A foundational step for any employer is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number serves as a federal tax ID and is required for reporting and remitting most federal employer taxes.

Withholding and Depositing Taxes

Employers are mandated to withhold federal income tax and the employee’s share of FICA taxes from each employee’s gross wages. The amount of federal income tax withheld is based on information provided by the employee on Form W-4, Employee’s Withholding Certificate. These withheld amounts, along with the employer’s share of FICA and FUTA taxes, must be deposited with the U.S. Treasury, typically through the Electronic Federal Tax Payment System (EFTPS). The deposit schedule depends on the employer’s total tax liability.

Reporting Taxes

Employers file Form 941, Employer’s Quarterly Federal Tax Return, four times a year to report withheld income taxes, Social Security tax, and Medicare tax. Annually, employers file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report their FUTA tax liability. By January 31st each year, employers must provide each employee with Form W-2, Wage and Tax Statement, summarizing their annual wages and taxes withheld. A copy of each W-2, along with Form W-3, Transmittal of Wage and Tax Statements, which summarizes all W-2 data, is submitted to the Social Security Administration. State tax agencies also require equivalent quarterly or annual reports for state unemployment and income tax withholding.

Recordkeeping

Employers must keep accurate and comprehensive records of employee information, wages paid, and taxes withheld and deposited. The IRS generally requires employment tax records to be retained for at least four years after the tax becomes due or is paid, whichever is later. These records should include details such as employee names, addresses, Social Security numbers, dates of employment, amounts and dates of wage payments, copies of tax returns filed, and deposit confirmations.