Payroll taxes are money taken from your paycheck to fund Social Security, Medicare, and unemployment insurance

When you see a deduction labeled FICA, Social Security, or Medicare on your pay stub, that is a payroll tax. Your employer withholds a percentage of your gross pay and sends it to the federal government. You also pay a matching amount through taxes on your employer's side — money that comes out of what they would otherwise pay you in wages. These taxes fund three programs: Social Security retirement and disability benefits, Medicare health insurance for people 65 and older, and unemployment insurance for workers who lose jobs.

Payroll taxes are separate from income tax. Income tax goes into the general Treasury and funds roads, defense, and other federal spending. Payroll taxes are earmarked — they can only be used for the three programs they fund. This is why you see them listed separately on your pay stub, and why the rates stay the same regardless of your income level (though there is a wage cap for Social Security).

Key Takeaways

  • Social Security tax is 6.2 percent of your wages up to a yearly cap; your employer pays another 6.2 percent on your behalf.
  • Medicare tax is 1.45 percent of all your wages with no cap; your employer pays another 1.45 percent, plus an additional 0.9 percent if you earn over $200,000 per year.
  • Unemployment insurance tax is paid entirely by your employer and varies by state and industry, typically between 0.6 and 6 percent of your wages.
  • Self-employed people pay both the employee and employer share of Social Security and Medicare taxes, totaling 15.3 percent combined.
  • The money withheld from your paycheck is not held in an account with your name on it — it goes into a general fund that pays current beneficiaries.

Social Security tax: 6.2 percent up to the wage cap

Social Security tax is 6.2 percent of your wages. Your employer withholds this from your paycheck and pays another 6.2 percent on top of your salary. The combined 12.4 percent funds Social Security retirement, survivor benefits, and disability insurance.

There is a wage cap. In 2024, you pay Social Security tax only on the first $168,600 of your annual income. Once you earn above that amount in a calendar year, no more Social Security tax is withheld from your paycheck for the rest of that year. Your employer also stops paying their share once you cross the cap. This means high earners pay a smaller percentage of total income in Social Security tax than lower-wage workers.

The wage cap changes every year based on average wage growth. If you work for multiple employers in the same year, each one withholds Social Security tax independently up to the cap. You may end up overpaying if your combined income from all jobs exceeds the cap; you can claim the overpayment as a credit on your tax return.

Medicare tax: 1.45 percent with no income limit

Medicare tax is 1.45 percent of your wages with no cap. Your employer pays another 1.45 percent. This 2.9 percent combined funds Medicare, the federal health insurance program for people 65 and older and some younger people with disabilities.

If you earn over $200,000 per year as a single filer (or $250,000 if married filing jointly), an additional 0.9 percent Medicare tax applies to income above those thresholds. This extra tax is withheld from your paycheck only — your employer does not pay a matching share. The additional Medicare tax was created by the Affordable Care Act and has no cap.

Unlike Social Security, there is no wage ceiling for the base Medicare tax. You pay 1.45 percent on every dollar you earn, no matter how much you make in a year.

Unemployment insurance tax: paid by employers, varies by state

Unemployment insurance (UI) tax is paid entirely by your employer, not withheld from your paycheck. The rate varies by state and by industry. Most employers pay between 0.6 and 6 percent of your wages, though some states charge higher rates for employers with frequent layoffs.

When you lose a job through no fault of your own, you may be able to file for unemployment benefits. The amount and duration depend on your state's rules and your earnings history. Unemployment insurance is a joint federal-state program, so the tax rate and benefit structure differ from state to state.

You do not see this tax on your pay stub because it does not come out of your wages. It is a cost your employer bears. Some employers pass this cost along indirectly through lower wages, but the tax itself is not deducted from your paycheck.

Self-employed people pay both sides of the tax

If you are self-employed, you pay both the employee and employer share of Social Security and Medicare taxes. This is called the self-employment tax. The combined rate is 15.3 percent: 12.4 percent for Social Security (up to the wage cap) and 2.9 percent for Medicare (with no cap).

You calculate self-employment tax on your net business income — your revenue minus business expenses. You report this on Schedule SE when you file your income tax return. You can deduct half of your self-employment tax as a business expense on your tax return, which reduces your taxable income.

Self-employed people file quarterly estimated tax payments to cover both income tax and self-employment tax. If you do not pay enough throughout the year, you may owe a penalty when you file your return.

How payroll taxes fund current benefits, not future ones

Payroll taxes do not go into an account with your name on it. The money you pay in Social Security and Medicare taxes goes into a general fund that pays benefits to current retirees, disabled workers, and Medicare beneficiaries. When you retire, your benefits will be paid by payroll taxes collected from workers at that time.

This is called a pay-as-you-go system. It works as long as the number of workers paying in roughly matches the number of people receiving benefits. As the population ages and life expectancy increases, the ratio of workers to beneficiaries has shifted, which is why Social Security and Medicare face long-term funding challenges.

Your payroll tax record is tracked by your Social Security number. The government keeps a record of how much you paid in over your lifetime, which determines how much you receive in benefits when you retire or become disabled. You can view your earnings record and benefit estimate on the Social Security Administration website.

Payroll tax withholding and your W-4 form

Your employer withholds payroll taxes based on information you provide on your W-4 form. You fill out a W-4 when you start a job, and you can update it anytime your situation changes — if you get married, have a child, take a second job, or expect a major change in income.

The W-4 does not control payroll tax withholding for Social Security and Medicare. Those amounts are fixed by law: 6.2 percent for Social Security (up to the cap) and 1.45 percent for Medicare. The W-4 controls federal income tax withholding, which is separate. If you want to adjust how much federal income tax is taken from your paycheck, you update your W-4.

Payroll taxes are withheld automatically and sent to the government on a set schedule. Your employer is required by law to withhold these amounts and remit them. You cannot opt out of payroll taxes, even if you do not plan to use Social Security or Medicare benefits.

Frequently Asked Questions

Why do I see both employee and employer payroll taxes?

Your employer pays a matching share of Social Security and Medicare taxes on top of your salary. This is a cost to the employer, not deducted from your paycheck. Economists debate whether this employer share is truly separate from your wages or whether it reduces what you would earn otherwise, but legally it is listed as a distinct tax.

Can I get a refund of payroll taxes I paid?

No. Payroll taxes are not refundable. The money goes into the Social Security and Medicare trust funds and cannot be returned. If you overpaid Social Security tax because you worked for multiple employers, you can claim the overpayment as a credit on your income tax return, but this reduces your income tax refund rather than giving you back the Social Security tax itself.

What happens to payroll taxes if I change jobs?

Each employer withholds payroll taxes independently based on your wages at that job. Your Social Security number links all your earnings to one record, so the government tracks your total income across all jobs. If your combined income exceeds the Social Security wage cap, you may overpay; claim the overpayment on your tax return. Medicare tax has no cap, so it is withheld on all wages regardless of how many jobs you have.

Do payroll taxes apply to all types of income?

Payroll taxes apply only to wages and self-employment income. Investment income, rental income, and most other types of income are not subject to payroll tax. However, if you have both wages and self-employment income, you pay payroll taxes on both, and the Social Security wage cap applies to your combined earnings.

What if my employer does not withhold payroll taxes?

Your employer is required by law to withhold and remit payroll taxes. If they do not, you are still liable for the taxes owed. Report the problem to your state labor department or the Department of Labor. You can also file a complaint with the IRS. Do not assume the taxes are forgiven just because your employer did not withhold them.