Payroll tax is a percentage of your wages that your employer withholds and sends to the federal government

Payroll tax funds Social Security and Medicare. The rate is fixed by federal law and does not change based on your income level or how much you earn. As of 2024, you pay 6.2% of your wages toward Social Security and 1.45% toward Medicare, for a total of 7.65%. Your employer pays an equal amount on your behalf — that money does not come out of your paycheck, but it is part of your total compensation cost to them.

The Social Security portion (6.2%) only applies to wages up to a certain annual cap. In 2024, that cap is $168,600, meaning once you earn that much in a year, Social Security tax stops being withheld from your remaining paychecks. Medicare tax (1.45%) has no cap and continues on all wages. If you earn over $200,000 as a single filer (or $250,000 married filing jointly), an additional 0.9% Medicare tax applies to the amount above that threshold.

Self-employed people pay both the employee and employer portions — 15.3% total — because they have no employer to split the cost. They can deduct half of this amount on their tax return.

Key Takeaways

  • You pay 6.2% for Social Security (up to the annual wage cap) and 1.45% for Medicare on every paycheck, totaling 7.65% of your gross wages.
  • Your employer pays an equal 7.65% on your behalf, though this does not appear on your paycheck.
  • Social Security tax stops once you reach the annual wage cap ($168,600 in 2024), but Medicare tax continues on all earnings.
  • High earners pay an additional 0.9% Medicare tax on wages above $200,000 (single) or $250,000 (married filing jointly).
  • Self-employed workers pay the full 15.3% themselves but can deduct half on their tax return.

How payroll tax appears on your pay stub

Your pay stub shows the amount withheld under labels like "Social Security Tax," "OASDI" (Old-Age, Survivors, and Disability Insurance), "Medicare Tax," or "FICA" (Federal Insurance Contributions Act). These are the same thing — different employers use different names. The amount withheld is calculated automatically based on your gross pay and the current tax rates.

If you have multiple jobs, each employer withholds payroll tax independently. This matters because the Social Security wage cap applies to your total earnings across all jobs, not per job. If you earn $100,000 at one job and $80,000 at another, you will hit the cap and overpay Social Security tax. You can claim the overpayment as a credit on your tax return, but you have to file to get it back — it does not happen automatically.

The difference between payroll tax and income tax withholding

Payroll tax and federal income tax withholding are two separate deductions on your paycheck. Payroll tax is a fixed percentage that goes to Social Security and Medicare. Income tax withholding is based on your W-4 form and varies depending on how many dependents you claim and your filing status. You can adjust your income tax withholding by submitting a new W-4 to your employer, but you cannot change your payroll tax rate — it is set by law.

Some states also withhold state income tax, and some cities withhold local income tax. These are separate from both federal payroll tax and federal income tax withholding. The total amount coming out of your paycheck can include all four: payroll tax, federal income tax, state income tax, and local income tax.

What happens to payroll tax money

Social Security tax funds retirement benefits, survivor benefits (paid to family members if you die), and disability benefits. Medicare tax funds hospital insurance (Part A) and some outpatient services. The money does not sit in an account with your name on it — it goes into a general trust fund that pays current beneficiaries. Your future benefits are based on your earnings history and how long you worked, not on how much you personally paid in.

The Social Security Administration and Centers for Medicare and Medicaid Services track your earnings through your Social Security number. You can view your earnings record and estimated benefits by creating an account at ssa.gov. This record is used to calculate your benefits when you reach retirement age or if you become disabled.

Payroll tax for different types of workers

W-2 employees have payroll tax withheld automatically by their employer. The employer files Form 941 quarterly to report and pay both the employee and employer portions. Contractors and self-employed people file Schedule SE with their tax return to calculate and pay self-employment tax, which covers both portions.

Household employees (nannies, housekeepers, caregivers) are subject to payroll tax if they earn over a certain threshold. In 2024, if you pay a household employee $2,700 or more in a year, you must withhold and pay payroll tax. The employer (you, in this case) is responsible for filing Form 941-H and paying both portions. Many household employers miss this requirement, which can create problems for the employee's Social Security record.

Certain groups are exempt from payroll tax, including some religious sect members, some students working for their school, and certain family members working in a family business. These exemptions are narrow and require specific documentation.

How payroll tax rates have changed

The Social Security tax rate has been 6.2% since 1990. The Medicare tax rate was 1.45% from 1966 until 2013, when the additional 0.9% Medicare tax on high earners took effect. These rates are set by Congress and do not change automatically — any change requires new legislation. The wage cap for Social Security is adjusted each year based on average wage growth in the economy.

During the COVID-19 pandemic, there was a temporary payroll tax deferral that allowed employers to delay paying the employer portion of Social Security tax. This was not a reduction — the deferred amount had to be repaid by the end of 2021. Most employers did not participate because the repayment obligation made it impractical.

Frequently Asked Questions

Why do I pay payroll tax if I might not collect Social Security?

Payroll tax is mandatory for all W-2 employees regardless of whether you expect to collect benefits. The money funds current retirees and disabled workers, not just future benefits. Even if you die before retirement, your family may receive survivor benefits, which are also funded by payroll tax.

Can I opt out of payroll tax?

No, with very narrow exceptions. W-2 employees cannot opt out. Self-employed people cannot opt out, though they can reduce self-employment income through legitimate business deductions. The only way to avoid payroll tax is to earn below the threshold for household employees or to may have access to for a specific religious exemption, which requires formal documentation.

What if my employer does not withhold payroll tax?

Report it to the IRS using Form 13909 or contact your state labor department. Your employer is legally required to withhold and pay payroll tax. If they do not, you may still owe the tax yourself, and the employer faces penalties and back taxes. Do not ignore this — it affects your Social Security record.

Do I get a refund if too much payroll tax was withheld?

Only for Social Security tax overpayment if you had multiple jobs and hit the wage cap more than once. You claim this on your tax return. Medicare tax and the additional Medicare tax are not refundable — you cannot get them back even if you overpaid.

How much payroll tax will I pay over my lifetime?

This depends on your earnings and how long you work. If you earn $60,000 a year for 40 years, you will pay roughly $183,600 in combined employee and employer payroll tax (using 2024 rates). The actual amount varies based on wage growth, job changes, and whether you hit the Social Security wage cap in any year.