Employer Taxes on Payroll: What You Owe Beyond the Paycheck

Most contractors already know that employer taxes on payroll add up. What fewer contractors know is exactly how much they add up to, or how directly that number affects every job they price. If you have been quoting work based on what you pay employees per hour without accounting for your full employer-side obligations, your labour cost is understated on every single job. That gap does not show up as a line item on your bid. It shows up as a margin problem at the end of the year.

Understanding what you actually owe as an employer is the starting point. Knowing how to put that information to work in your job costing is what changes how you run the business.

What You’ll Learn

• As an employer, you are responsible for paying your share of Social Security and Medicare taxes on every employee’s wages, on top of what you withhold from their paycheck.

• Federal and state unemployment taxes add another layer to your payroll cost, and those rates can vary based on your claims history and the state your employees work in.

• Workers’ compensation insurance functions like a payroll cost for contractors, and the rate you pay depends on the type of work your employees perform.

• If you are pricing jobs based on gross wages rather than your true cost per labour hour, you are underpricing your work on every job.

• Clean, well-categorised books are the only way to know your actual labour cost per job and protect your margins over time.

The Gap Between the Hourly Rate and What Hiring Actually Costs

Here is something that catches a lot of contractors off guard. When you hire someone at $28 per hour, your cost per hour of labour on that job is not $28. It is materially higher once you account for your full employer-side obligations.

This is not a technicality. It is a real number that determines whether your jobs are priced to make money or priced to slowly compress your margins over time. For contractors running monthly bookkeeping for contractors and wondering why profitability feels harder to track as the crew grows, this is often part of the answer.

The four categories that sit between the gross wage and your true labour cost are:

• Employer FICA taxes (Social Security and Medicare)

• Federal Unemployment Tax (FUTA)

• State Unemployment Tax (SUTA)

• Workers’ compensation insurance

Each one is explained below. None of them are complicated once you see them clearly.

What Are Employer Taxes on Payroll? A Clear Breakdown

Employer taxes on payroll are the obligations you carry as a business owner on top of the wages you pay. They are entirely separate from the taxes you withhold from your employees’ paychecks. Your employees have their own FICA withholding, their own federal income tax withheld, and their own state income tax withheld. Your employer-side obligations are an additional cost your business bears.

Here is how each category works.

FICA: Social Security and Medicare

FICA is the Federal Insurance Contributions Act tax. It applies to both employer and employee, and each side pays their own share.

As an employer, you pay your own share of FICA taxes on every employee’s wages: 6.2% for Social Security (up to the annual wage base) and 1.45% for Medicare, which means your actual payroll cost starts at least 7.65% above the gross wage before any other employer obligations are added.

The Social Security portion (6.2%) only applies up to an annual wage base set by the IRS each year. Once an employee exceeds that threshold in a calendar year, you stop paying the Social Security portion for the remainder of the year. The Medicare portion (1.45%) has no wage cap and applies to every dollar of wages.

These are your employer FICA obligations: non-negotiable, calculated per employee, and due on a regular deposit schedule.

FUTA: Federal Unemployment Tax

FUTA stands for Federal Unemployment Tax Act. The gross rate is 6% applied to the first $7,000 of each employee’s wages per year. Most employers who make their state unemployment payments on time receive a federal credit that brings the effective rate down to 0.6%.

That means your maximum annual FUTA cost per employee is typically $42 per year at the 0.6% effective rate ($7,000 x 0.006). It is not the largest number on this list, but it is a real futa tax for employers obligation and it cannot be skipped.

If your state unemployment payments are late or incomplete, you lose the credit and pay the full 6%, which is a meaningful penalty for a straightforward compliance issue.

SUTA: State Unemployment Tax

SUTA is your state-level unemployment tax. Every state runs its own program, sets its own rate structure, and applies its own taxable wage base. Your specific rate depends on two things: the state your employees work in, and your experience rating (which reflects your history of employee claims).

New employers typically start at a standard rate assigned by the state. That rate adjusts over time based on your unemployment claims history. If former employees have filed claims against your business, your rate can increase. If your claims history is clean, your rate can decrease.

For contractors operating across state lines, note that SUTA rates and wage bases vary significantly. A Wisconsin-based contractor with employees working on projects in another state may carry obligations in that state as well, depending on where the work is performed and how it is classified.

Workers’ Compensation Insurance

Workers’ compensation is not technically a payroll tax, but it functions as a direct labour cost for contractors and belongs in this conversation. The premium you pay is calculated as a rate per $100 of payroll, and that rate is tied to the job classification of each employee.

For trades businesses, this is not a minor figure. A general labourer carries a different rate than a roofer. An electrician carries a different rate than a finish carpenter. Workers’ compensation rates reflect the injury risk of the work, and for high-risk classifications, the cost can be substantial relative to the hourly wage.

This is also an area where the payroll cost per employee can vary significantly within the same business, depending on what your crew members actually do on the job.

Cost Category	Basis	Rate / Notes
Social Security (Employer)	Gross wages up to annual wage base	6.2%
Medicare (Employer)	All gross wages, no cap	1.45%
FUTA	First $7,000 of wages per employee	0.6% effective (with state credit)
SUTA	Varies by state and experience rating	Varies widely
Workers’ Comp Insurance	Per $100 of payroll	Varies by job classification

How Much Does Payroll Actually Cost Per Employee?

This is where the employer payroll tax breakdown becomes concrete. The figures below are illustrative. Your actual costs will depend on your state, your workers’ comp classifications, your SUTA experience rating, and other factors specific to your business. The purpose here is to show how the layers stack.

Take a carpenter on your payroll at $28 per hour.

Step one: gross wages for a 40-hour week

$28 x 40 hours = $1,120 gross wages

Step two: add employer FICA (7.65%)

$1,120 x 0.0765 = approximately $86

Step three: add FUTA (effective rate, annualised)

FUTA caps at $42 per year per employee. Spread across a full-year work week, the per-week cost is less than $1. For simplicity, call it nominal in the weekly calculation but real as an annual obligation.

Step four: add SUTA

SUTA rates vary significantly. For illustration, using a hypothetical blended rate of 2.5% on applicable wages: $1,120 x 0.025 = approximately $28 per week.

Step five: add workers’ compensation

For a carpentry classification, a hypothetical rate of $8.50 per $100 of payroll translates to: $1,120 / 100 x $8.50 = approximately $95 per week.

Estimated total employer cost for this employee in this week:

$1,120 (gross wages) + $86 (FICA) + $28 (SUTA) + $95 (workers’ comp) = approximately $1,329

That is an additional cost of around $209 on top of the $1,120 in gross wages, or roughly 19% above the gross wage in this example. With a higher workers’ comp classification (roofing, for example), that percentage climbs further.

For contractors, the true cost of a worker on your payroll is not the hourly rate on the invoice. It includes employer payroll taxes, federal and state unemployment contributions, and workers’ compensation insurance, all of which must be factored into your job pricing to protect your margin.

This is what your bookkeeper should be helping you see. If the payroll records in your books show gross wages only, without the employer-side obligations allocated alongside them, you do not have the full picture.

How Does This Change the Way You Should Price Your Jobs?

This is the question that matters most for a contracting business. Understanding how much does payroll tax cost a business is useful. Knowing how that cost flows into your job pricing is what actually protects your margins.

The Fully-Loaded Labour Rate

A fully-loaded labour rate is the total cost you carry per hour of labour on a job. It is not the gross hourly wage. It is the gross hourly wage plus every employer obligation attached to that hour of work.

The most common job pricing mistake contractors make is using gross wages as their labour cost. The moment you account for your full employer-side obligations, the number you should be building your bids around is materially higher.

Using the carpenter example above, the true hourly cost is closer to $33 per hour, not $28, once employer obligations are included in this illustration. If your bid for a week-long job uses $28 as your labour cost and the actual cost is $33, you are leaving money on the table before you have lifted a tool.

For a crew of five on a two-week project, that gap can represent thousands of dollars in margin that never shows up because it was never built into the price.

From Gross Wage to Fully-Loaded Rate: The Steps

1. Start with gross hourly wage

2. Add employer FICA (7.65% for most employees)

3. Add SUTA contribution (your specific rate for your state)

4. Add workers’ compensation premium (your rate for each job classification)

5. Add any other employer-paid benefits or leave costs you carry

This is your true cost per labour hour. This is the number your bids need to reflect.

For contractors working across multiple states, including those with employees on projects in Florida, Illinois, or Texas, the SUTA rates and workers’ comp classifications may differ by location. This makes it even more important to track payroll costs accurately by job and by state rather than applying a single blended estimate across all your work.

Why Clean Books Are the Only Way to Track This Accurately

Knowing the formula for a fully-loaded labour rate is a start. Being able to apply it to each job you run is a different problem, and that is where your bookkeeping setup either helps or hurts you.

Most contractors with basic bookkeeping in place have payroll recorded at the gross wage level. Payroll transactions hit the books, bank reconciliations happen, and the numbers are technically accurate. But if your employer-side tax obligations are not categorised and allocated alongside the wages they correspond to, you cannot calculate your real labour cost per job. You have payroll data. You do not have job-level cost data.

This is the difference between outsourced accounting that functions as a business intelligence tool and bookkeeping that functions as a recordkeeping exercise.

Clean, advisory-level books for a contracting business capture:

• Gross wages by employee and by job

• Employer FICA, FUTA, and SUTA allocated to each payroll period

• Workers’ compensation costs tracked by classification and by project where possible

• Monthly reports that show labour cost as a true cost, not a gross wage estimate

When your books are set up this way, you can look at a completed job and know whether your labour cost came in where you expected. You can look at a crew’s performance across multiple projects and spot patterns. You can price the next job with confidence rather than instinct.

Joe works with contractor clients throughout the year because payroll questions and job costing problems do not wait for April. When a question comes up mid-project or at quarter end, you need an advisor you can reach by phone or text, not one who only surfaces when filing season opens. That responsiveness is central to how Aligned CPA operates.

If you want to understand how your current bookkeeping setup handles payroll cost allocation and job costing, a $300 Strategy Consultation is the right starting point. The consultation fee is credited toward services if you decide to move forward. It is a conversation, not a commitment.

The Year-Round Planning Layer

Payroll is not just an administrative function. The data that flows through your payroll records feeds directly into your tax position throughout the year, and managing it proactively is the difference between being prepared at quarter-end and being caught off guard.

Your federal payroll tax deposit schedule is set by the IRS based on your total tax liability. Most small and mid-sized contracting businesses deposit on a monthly or semi-weekly schedule. Falling behind on deposits triggers penalties that are entirely avoidable with a proper tracking system in place.

Beyond the deposit schedule, payroll information feeds into broader decisions:

• Whether your current entity structure (LLC, S Corp) is handling owner compensation and payroll tax efficiently

• How quarterly payroll tax payments interact with your estimated income tax payments

• Whether your workers’ comp classifications are accurate and whether any employees have been misclassified in a way that affects both your premium and your compliance position

Year-round tax planning is what connects your payroll obligations to your overall tax strategy. A firm that tracks your payroll data month by month can flag issues before they become penalties, and can build the kind of accurate picture that makes year-end planning meaningful rather than reactive.

The second campaign Aligned CPA is building, focused specifically on tax preparation and tax planning, will go deeper into these connections. For now, the most important thing is that your payroll records are clean enough to support the analysis when the time comes.

For contractors in Wisconsin, including those operating out of Madison, Green Bay, Eau Claire, and Appleton, SUTA rates and workers’ comp premium structures are administered at the state level. Contractors with crews working on projects in Florida, including in Tampa, Orlando, Jacksonville, and Miami, may carry separate obligations in those states. An advisor familiar with multi-state payroll can help you track what you owe where, which is a detail that gets harder to manage as your crew and your project footprint grow.

Questions Contractors Ask About Employer Taxes on Payroll

Key Takeaways

• Employer taxes on payroll include FICA (7.65% of gross wages), FUTA (effectively 0.6% on the first $7,000 per employee), SUTA (varies by state and experience rating), and workers’ compensation (varies by job classification)

• These obligations sit entirely on your side of the payroll ledger, separate from anything withheld from your employees

• Your true cost per labour hour is materially higher than the gross wage you pay, and the gap depends on your state, your trade classifications, and your claims history

• Pricing jobs from gross wage rather than fully-loaded labour rate leads to understated labour costs in every bid

• Accurate payroll allocation by job is only possible with clean, properly categorised books; basic transaction recording is not enough

• Quarterly employer tax obligations are manageable with the right tracking systems and an advisor who stays in contact throughout the year, not just at filing time

Ready to See Your Real Labour Cost?

If your books do not currently break down payroll costs by job, you cannot know whether your jobs are actually profitable. A $300 Strategy Consultation with Aligned CPA is the right place to start. You will get a clear-eyed review of how your current accounting setup handles payroll cost tracking and job costing, and a direct answer to whether your margins are being measured accurately. If you decide to move forward, the $300 is credited toward your first month of services.

Book your $300 Strategy Consultation

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