Payroll taxes are taxes that both employees and employers pay based on employees' wages, tips, commissions, and salaries. The employees' portion is deducted from each paycheck, while the employer pays their portion directly to the IRS.
Types of Payroll Taxes
Payroll taxes fund federal social insurance programs such as Social Security, Medicare, and unemployment. While deductions for federal, state, and local income taxes and contributions to benefits like health insurance or 401(k) plans may appear on your pay stub, these are not considered payroll taxes and do not require corresponding employer payments.
The following are considered payroll taxes:
Social Security and Medicare (FICA Taxes)
Social Security and Medicare taxes are collectively known as FICA taxes, which stands for the Federal Insurance Contributions Act. Both employers and employees pay FICA taxes to support Medicare and Social Security programs.
-
Employee Contributions:
- Social Security: 6.2% of total compensation, up to the annual wage base limit of $160,200 in 2025.
- Medicare: 1.45% of all compensation, with no wage base limit.
- Together, these total 7.65% of an employee’s income. For every $1,000 earned, employees pay $76.50 in payroll taxes.
-
Employer Contributions:
- Employers are responsible for contributing an equal amount:
- 6.2% for Social Security (up to the $160,200 limit).
- 1.45% for Medicare, with no wage base limit.
Additional Medicare Tax
Employees earning above certain income thresholds are subject to an additional Medicare tax of 0.9% on earnings over the threshold. Employers are not required to match this tax. The thresholds are:
- $200,000 for single filers
- $250,000 for joint filers
- $125,000 for married individuals filing separately
This brings the total Medicare tax rate for high earners to 2.35% on income above the threshold.
Federal Unemployment Tax (FUTA)
FUTA supports unemployment benefits for terminated employees and helps states fund their unemployment programs. Employers are solely responsible for paying this tax; it is not deducted from employees' wages.
- FUTA Rate: 6% on the first $7,000 of each employee’s wages.
- Employers may qualify for a credit of up to 5.4%, effectively reducing the FUTA rate to 0.6% if they pay state unemployment taxes.
If You Are Self-Employed
Self-employed individuals are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, collectively known as the self-employment tax.
- Self-Employment Tax Rate: 15.3% of net earnings, consisting of:
- 12.4% Social Security tax, up to the wage base limit of $160,200.
- 2.9% Medicare tax, with no wage base limit.
- High earners must also pay the additional 0.9% Medicare tax on income exceeding the same thresholds as employees.
Takeaway
Payroll taxes reduce your total gross income, meaning your listed salary will not reflect the amount you take home. Additional deductions for income taxes, retirement contributions, and healthcare premiums further decrease your take-home pay. However, unlike other taxes, payroll taxes directly fund your future Social Security and Medicare benefits, ensuring financial support during retirement.