ER tax is shorthand for employer tax: the payroll taxes a business pays from its own funds on each employee’s wages, separate from anything withheld from the worker’s paycheck. In 2026, the federal ER tax rate is 7.65% of wages for Social Security and Medicare combined, plus a small federal unemployment tax and a state unemployment tax that varies by employer. The Social Security portion stops once an employee’s yearly pay crosses $184,500.1Social Security Administration. Contribution and Benefit Base
ER Tax vs. What’s Withheld From Employees
Running payroll involves two different pots of money, and only one of them is your cost. The employer share of Social Security and Medicare, plus all federal and state unemployment taxes, comes out of your business. Federal income tax withholding and the employee’s share of Social Security and Medicare come out of the employee’s paycheck. You send both to the government, but only the employer half shows up as an expense on your books.
The withheld portion has a special legal status. The IRS calls it trust fund money because it was never the employer’s to begin with. Using it for anything other than a timely tax deposit carries consequences well beyond ordinary late-payment penalties, which is covered further down.
Social Security and Medicare: The Employer Share of FICA
The Federal Insurance Contributions Act is the biggest piece of ER tax for almost every employer. It has two components, and you match your employee’s contribution on both.
Social Security tax is 6.2% of wages, paid by employer and employee alike, up to an annual wage base. For 2026 that base is $184,500, so the most you’ll pay in Social Security tax for any one worker is $11,439.1Social Security Administration. Contribution and Benefit Base Once cumulative pay in the calendar year clears that ceiling, the 6.2% stops for the rest of the year.
Medicare tax is 1.45% of wages, with no cap. Every dollar of wages is subject to the 1.45% on both sides.2Social Security Administration. FICA and SECA Tax Rates
There is also a 0.9% Additional Medicare Tax on wages above $200,000 in a calendar year, but this one sits entirely on the employee. You must start withholding it once a worker crosses $200,000, and you do not match it.3Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Run the math on a worker earning $60,000 a year and the FICA piece of ER tax comes to $3,720 in Social Security tax and $870 in Medicare tax, or $4,590 total, before any unemployment tax.
Federal Unemployment Tax (FUTA)
FUTA is employer-only. Nothing is withheld from the employee.4Internal Revenue Service. Federal Unemployment Tax The headline rate is 6.0% on the first $7,000 of each employee’s yearly wages, but almost nobody pays that. Paying state unemployment on time earns a credit of up to 5.4% against the federal rate, bringing the effective FUTA rate to 0.6%, or a maximum of $42 per employee for the year.5Department of Labor – Office of Unemployment Insurance. Federal Unemployment Tax Act – Unemployment Insurance Tax Fact Sheet
You’re subject to FUTA if you paid $1,500 or more in wages in any calendar quarter during the current or prior year, or if you had at least one employee for any part of a day in 20 different weeks.6Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions Household employees and agricultural workers use different thresholds ($1,000 in cash wages per quarter for household employees; $20,000 per quarter or 10 workers for 20 weeks for farm labor).
One catch on the credit: when a state has borrowed from the federal unemployment fund and hasn’t repaid within two years, employers in that state lose part of the 5.4% credit and pay more federal tax. For the 2025 tax year, employers in California faced a 1.2% credit reduction and employers in the U.S. Virgin Islands faced a 4.5% reduction.7Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025 The list changes year to year.
State Unemployment Tax (SUTA)
Every state runs its own unemployment insurance program, and SUTA is where employer costs diverge sharply from one business to the next. Your rate is experience-rated: it depends on how many of your former employees have collected unemployment benefits. High-turnover employers and businesses with frequent layoffs pay more; stable employers with few claims pay less. New businesses without a claims record get a default rate that varies by state, and sometimes by industry.
Wage bases vary just as widely. Some states cap SUTA at the $7,000 federal floor; others go past $60,000. A state with a $40,000 wage base and a 3% rate costs $1,200 per employee before FICA even enters the picture. It’s worth pulling your state’s current rate schedule at the start of each year.
Paying SUTA on time is also what unlocks the 5.4% FUTA credit. Falling behind on the state side raises your federal bill too.
What Wages Count
ER tax applies broadly. Salaries, hourly wages, overtime, bonuses, commissions, vacation pay, severance, back pay, and taxable fringe benefits all count as wages for FICA and unemployment purposes. Tips reported by the employee are FICA wages, and cash tips of $20 or more in a month are FUTA wages too.8Internal Revenue Service. Publication 15, Employer’s Tax Guide Employer contributions to qualified retirement plans, most employer-paid health insurance premiums, and workers’ compensation payments are outside FICA wages.
Only Employees Trigger ER Tax
ER tax attaches only to workers who are legally employees. Independent contractors pay their own self-employment tax and generate no employer FICA, FUTA, or SUTA. That’s why classification matters: treat someone as a contractor when the law would call them an employee, and you owe all the back FICA, FUTA, and SUTA you should have been paying, plus penalties and interest.9Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
The IRS looks at three categories of evidence:10Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
- Behavioral control — do you control how the work gets done, not just the result?
- Financial control — do you provide tools, reimburse expenses, or dictate how the worker is paid?
- Relationship — are there written contracts, benefits, or an indefinite arrangement?
No single factor decides it. If you’re genuinely unsure, Form SS-8 lets you ask the IRS for a formal ruling.
Penalties for Getting ER Tax Wrong
Late deposits are penalized on a sliding scale based on how late they are:11Internal Revenue Service. Failure to Deposit Penalty
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- More than 10 days after a first IRS notice: 15%
The tiers don’t stack; a deposit 12 days late is penalized at 5%, not 2% plus 5%. Filing Form 941 or Form 940 late is a separate 5% per month, capped at 25% of the unpaid tax.12Internal Revenue Service. Information About Your Notice, Penalty and Interest
The most dangerous penalty in this area is the Trust Fund Recovery Penalty. When a business withholds Social Security, Medicare, and income tax from employee paychecks and doesn’t send it to the IRS, the penalty is 100% of the unpaid trust fund amount.13Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax It can be assessed personally against anyone with authority over how the business spent money and who willfully chose to pay other bills first — officers, directors, controlling shareholders, even a bookkeeper with check-signing authority.14Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP) Willfulness here doesn’t require intent to defraud. Knowing employment taxes are owed and paying vendors anyway is enough.
An employee whose role was strictly to pay bills as directed generally isn’t treated as a responsible person. The line runs at who could have chosen otherwise.