Payroll Tax
Taxes withheld from wages and matched by employers to fund Social Security and Medicare.
What is Payroll Tax?
Payroll taxes are taxes levied on wages and salaries, primarily funding Social Security and Medicare under the Federal Insurance Contributions Act (FICA). The Social Security tax rate is 12.4%, split equally between employer (6.2%) and employee (6.2%), and applies only to wages up to the annual Social Security wage base ($176,100 in 2025). The Medicare tax is 2.9% with no wage cap (split 1.45% each), plus a 0.9% Additional Medicare Tax on wages exceeding $200,000 for single filers. Self-employed individuals pay the full 15.3% as the self-employment tax but may deduct half on their income tax return. Payroll taxes are regressive at higher income levels because the Social Security wage cap means high earners pay a lower effective rate on total income.
Example
An employee earns $80,000 annually. Their employer withholds 6.2% × $80,000 = $4,960 for Social Security and 1.45% × $80,000 = $1,160 for Medicare — a total of $6,120 from the employee's paycheck. The employer separately contributes an identical $6,120 match. Combined, payroll taxes on this employee total $12,240 — more than the employee's federal income tax for many households at this income level.