What Is Payroll Tax?
In plain English
Payroll taxes are taxes withheld from employee wages and matched by employers to fund Social Security and Medicare. Employees pay 6.2% for Social Security (up to the annual wage base) and 1.45% for Medicare. Employers match those amounts exactly. Self-employed individuals pay both the employee and employer share as self-employment tax at a combined 15.3% rate.
How Do Payroll Taxes Differ From Income Tax?
Payroll taxes fund specific programs — Social Security and Medicare — and are calculated as a flat percentage of wages, not a progressive rate. Income tax is calculated on a graduated scale and funds general government operations. Both are withheld from paychecks, but payroll taxes appear on your pay stub as 'FICA' (Federal Insurance Contributions Act) charges separate from federal income tax withholding.
What Is the Social Security Wage Base?
The Social Security portion of payroll tax applies only to wages up to an annual ceiling — $168,600 in 2024 — adjusted each year for average wage growth. Once earnings exceed this amount, no additional Social Security tax is withheld for the year. The Medicare portion has no wage base cap and applies to all earned income, with an additional 0.9% on wages above $200,000.
Do Payroll Taxes Fund Future Benefits?
Yes. Your Social Security contributions — tied to your Social Security Number — create an earnings record that determines your eventual benefit. More years of higher earnings generally produce a larger benefit at retirement. Medicare contributions similarly fund your eligibility for Medicare at age 65. You need at least 40 quarters (10 years) of covered employment to qualify for Social Security retirement benefits.
Frequently asked questions
Can employees see payroll taxes on their pay stub?
Yes. Your pay stub shows federal income tax withholding separately from Social Security tax and Medicare tax withheld. The employer's matching contribution does not appear on your stub — it is an additional cost paid by the employer directly to the IRS.
Are payroll taxes deductible?
The employee's share is not deductible on personal returns. Employers deduct their matching share as a business expense. Self-employed individuals deduct half of their self-employment tax (which combines both shares) as an above-the-line deduction on Form 1040.
Keep exploring
Related terms
Self-Employment Tax
Self-employment tax covers Social Security and Medicare contributions for self-employed individuals who do not have an employer withholding these taxes. The current combined rate is 15.3%.
Withholding
Withholding is the portion of your paycheck your employer sends directly to the IRS and state tax authorities on your behalf throughout the year. It serves as a pay-as-you-go mechanism for income taxes.
W-2 Form
A W-2 form reports an employee's annual wages and the taxes withheld by their employer. Employers must send W-2s by January 31 each year for use in filing federal and state tax returns.
Estimated Taxes
Estimated taxes are quarterly tax payments made to the IRS by individuals whose income is not subject to withholding. They are required for the self-employed, investors, and others who expect to owe at least $1,000 at filing.
Tax Deduction
A tax deduction reduces your taxable income, lowering the amount of income subject to tax. The actual tax savings depend on your marginal tax bracket.