Payroll Taxes are taxes withheld from employees’ wages and paid by both employers and employees to fund Social Security, Medicare, and unemployment insurance programs. These taxes are mandatory for most workers and employers, representing a significant component of the overall tax burden for working Americans. Unlike income taxes that vary based on deductions and credits, payroll taxes apply to virtually all earned income up to certain limits.
The primary components of payroll taxes are FICA (Federal Insurance Contributions Act) taxes, which fund Social Security and Medicare. Social Security tax is 6.2% for both employees and employers (12.4% total) on wages up to the annual wage base limit ($168,600 for 2024). Medicare tax is 1.45% for both employees and employers (2.9% total) on all wages with no cap. High earners pay an Additional Medicare Tax of 0.9% on wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly, paid only by the employee without employer matching.
Employers also pay Federal Unemployment Tax (FUTA) at 6% on the first $7,000 of each employee’s wages, though most employers receive credits reducing the effective rate to 0.6%. This tax funds unemployment compensation programs for workers who lose their jobs. Some states impose additional State Unemployment Tax (SUTA).
Payroll taxes differ fundamentally from federal income tax. While income tax rates are progressive and subject to deductions and credits, payroll taxes apply at flat rates to earned income. Employers withhold payroll taxes from each paycheck and remit them to the IRS along with their matching contributions, typically monthly or semi-weekly depending on payment size.
Self-employed individuals pay both the employer and employee portions of payroll taxes through self-employment tax (15.3% on net earnings), calculated on Schedule SE. However, they can deduct half of their self-employment tax as an adjustment to income, partially offsetting the additional burden. Payroll taxes appear on Form W-2 in boxes 4 (Social Security tax withheld) and 6 (Medicare tax withheld), providing documentation for your tax return and future benefit calculations.
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