Payroll taxes are taxes withheld from an employee’s paycheck and paid by employers to fund government programs such as Social Security, Medicare, and unemployment benefits.
Payroll taxes are separate from federal income tax and are calculated based on wages earned, not filing status or deductions.
✅ Key Components of Payroll Tax
🟦 Social Security Tax
Funds retirement, disability, and survivor benefits.
- Employee rate: 6.2% (withheld from wages)
- Employer rate: 6.2% (matching contribution)
- Wage limit: Applies only up to an annual cap
- Example: $176,100 for tax year 2025
🟩 Medicare Tax
Funds hospital insurance under Medicare.
- Employee rate: 1.45%
- Employer rate: 1.45%
- No wage cap – applies to all wages
➕ Additional Medicare Tax
- Extra 0.9% withheld from the employee only
- Applies to wages over:
- $200,000 (Single)
- $250,000 (Married Filing Jointly)
- ❌ Employers do not match the additional 0.9%
🟨 Federal Unemployment Tax (FUTA)
- Paid only by employers
- Helps fund unemployment benefits
- Not withheld from employee paychecks
🟧 State and Local Payroll Taxes
May include:
- State unemployment insurance (SUTA)
- State disability insurance
- Local payroll or transit taxes
✅ Rules and rates vary by state and locality.
📌 Example
An employee earns $1,000 in a pay period.
Employee withholding:
- Social Security: $62.00 (6.2%)
- Medicare: $14.50 (1.45%)
Total withheld: $76.50
Employer also pays:
- Social Security: $62.00
- Medicare: $14.50
✅ Total employer payroll tax: $76.50
✅ Total payroll taxes generated: $153.00
🧠 Why Payroll Taxes Matter
- Payroll taxes are withheld automatically and reported on Form W‑2
- They:
- Do not depend on deductions or credits
- Do not reduce taxable income
- Self‑employed individuals pay payroll taxes through the self‑employment tax instead
💡Tips
- Payroll taxes ≠ federal income tax (taxpayers often confuse these)
- Even taxpayers with no income tax owed still pay payroll taxes
- The Social Security portion stops once the wage cap is reached
- The Additional Medicare Tax is withheld by employers, but thresholds differ by filing status
- Payroll taxes fund benefits—paying them helps workers earn future Social Security credits