Payroll Tax

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Understanding Payroll Tax: FICA, Medicare, and Unemployment Explained

Key takeaways
* Payroll taxes fund specific government programs—primarily Social Security and Medicare—and are withheld from wages.
* FICA combines Social Security (6.2% employee / 6.2% employer) and Medicare (1.45% employee / 1.45% employer), for a combined 7.65% each paid by employee and employer.
* Self-employed individuals pay both shares via the self-employment tax (15.3%) but may deduct the employer portion.
* Employers pay federal and state unemployment taxes; rates and rules vary by state and industry.
* Payroll taxes are generally flat (with a Social Security wage cap that adjusts annually), while income taxes are progressive.

What is a payroll tax?
Payroll taxes are taxes levied on wages, salaries, bonuses, commissions, and tips. They are collected from earnings to finance programs such as Social Security, Medicare, unemployment insurance, and sometimes local services. Employers withhold payroll taxes from employees’ paychecks and remit them to tax authorities; employers also pay matching or additional payroll-related taxes.

Core components

  1. FICA (Federal Insurance Contributions Act)
  2. Social Security tax: 6.2% paid by the employee and 6.2% by the employer (12.4% total). Wages above the annual taxable wage base are not subject to Social Security tax; that wage base is adjusted each year.

  3. Medicare tax: 1.45% paid by the employee and 1.45% by the employer (2.9% total). An additional 0.9% Medicare surtax applies to employee earnings above a statutory threshold ($200,000 for single filers), and that surtax is paid by the employee only.

  4. Trust funds and program purposes

  5. Social Security contributions go into trust funds that pay retirement, survivor, and disability benefits.

  6. Medicare payroll contributions primarily fund Medicare Part A (hospital insurance). Parts B and D are funded by premiums, general revenues, and other sources.

  7. Unemployment taxes

  8. Employers are primarily responsible for unemployment insurance through federal (FUTA) and state (SUTA) taxes. Rates and taxable wage bases vary by state and employer experience. Unemployment taxes fund temporary benefits for eligible laid-off workers.

Self-employment tax
* Self-employed individuals must pay both the employee and employer portions of Social Security and Medicare taxes via the self-employment tax (combined rate of 15.3%: 12.4% Social Security + 2.9% Medicare), plus any applicable additional Medicare surtax on high earnings.
* Self-employed taxpayers can deduct the employer-equivalent portion of the self-employment tax when calculating adjusted gross income.

How payroll taxes differ from income taxes
* Payroll taxes fund specific entitlement and insurance programs and are generally flat up to applicable caps.
* Income taxes are progressive, with rates that increase as taxable income rises, and the revenue goes into general government funds.
* Both types may be withheld from paychecks but serve different purposes and follow different rate structures.

Calculating and reporting
* Employers withhold employee shares of Social Security and Medicare and remit both employee and employer portions to tax authorities.
* Payroll taxes are itemized on pay stubs so employees can see amounts withheld for Social Security, Medicare, and income taxes.
* Self-employed individuals report and pay self-employment tax on their tax returns, typically making quarterly estimated payments.

Practical notes
* Annual wage bases and thresholds change periodically; check current-year limits for exact figures.
* Many states also collect income or payroll-related taxes; rules and rates vary.
* If you don’t receive a traditional paycheck (for example, as an independent contractor), you are responsible for estimating and paying the appropriate payroll-equivalent taxes yourself.

Bottom line
Payroll taxes are a fundamental funding mechanism for Social Security, Medicare, and unemployment benefits. Employees and employers share most payroll tax burdens, while self-employed individuals cover both shares. Understanding rates, caps, and distinctions from income tax helps workers and business owners manage withholding, tax planning, and compliance.