Employment tax is money withheld from your paycheck and paid by your employer to cover Social Security, Medicare, and federal income tax

Employment tax is not one number — it is three separate taxes taken from your wages. Federal income tax comes out based on what you told your employer on your W-4 form. Social Security tax is 6.2% of your gross pay, up to a yearly cap (in 2024, that cap is $168,600 of income). Medicare tax is 1.45% of all your gross pay, with no cap. If you earn over $200,000 as a single filer, an additional 0.9% Medicare tax applies to income above that threshold.

Your employer also pays employment tax on your behalf — the same 6.2% for Social Security and 1.45% for Medicare. You do not see this money leave your account, but it is part of what your employer spends to hire you. The federal income tax withholding is yours alone; your employer does not pay a matching share.

The total you see withheld from a typical paycheck is usually between 15% and 25% of your gross pay, depending on your income, filing status, and what you claimed on your W-4. Self-employed people pay both the employee and employer share themselves, which is why their tax bill is often higher.

Key Takeaways

  • Social Security tax is 6.2% of your pay up to $168,600 per year; Medicare tax is 1.45% of all pay with no limit.
  • Federal income tax withholding varies based on your W-4 form and changes if you get a raise, second job, or major life change.
  • Your employer pays a matching 6.2% Social Security and 1.45% Medicare tax on top of your salary.
  • Self-employed workers pay both the employee and employer share of Social Security and Medicare, totaling 15.3% for those taxes alone.

How federal income tax withholding works

Federal income tax withholding is calculated using your W-4 form, which you fill out when you start a job. The form asks for your filing status (single, married, head of household), number of dependents, and whether you have other income or jobs. Based on your answers, your employer withholds a percentage of each paycheck.

The amount withheld is an estimate. If you withhold too much, you get a refund when you file your tax return. If you withhold too little, you owe money. You can change your W-4 anytime — when you get married, have a child, take a second job, or if your tax bill was too high or too low last year. Many people update their W-4 in January or after a major life event.

The IRS provides a withholding calculator on its website (irs.gov) that walks you through the W-4 questions and tells you what to claim. If you have a complex situation — multiple jobs, a spouse who also works, rental income, or significant deductions — using the calculator is faster than guessing.

Social Security and Medicare tax rates and caps

Social Security tax is 6.2% of your wages, but only up to a yearly earnings cap. In 2024, you pay Social Security tax on the first $168,600 you earn; anything above that is not subject to Social Security tax. The cap changes each year based on wage growth. Medicare tax has no cap — you pay 1.45% on every dollar you earn, no matter how much you make.

If you earn over $200,000 (or $250,000 if married filing jointly), you also pay an additional 0.9% Medicare tax on the income above that threshold. This extra tax was added in 2013 and applies to both employees and self-employed workers. Your employer withholds it automatically if your pay crosses that threshold.

These rates have been the same since 1990 for Social Security and since 1966 for Medicare, though Congress can change them. The earnings cap for Social Security changes every January based on the previous year's average wage growth.

What self-employed people pay

If you are self-employed, you pay both the employee and employer share of Social Security and Medicare tax. That means 12.4% for Social Security (up to the yearly cap) and 2.9% for Medicare, totaling 15.3% before any federal income tax. You pay this through self-employment tax, calculated on Schedule SE of your tax return.

Self-employed workers can deduct half of their self-employment tax when calculating their adjusted gross income, which lowers their taxable income slightly. You still owe the full amount, but the deduction reduces the income subject to federal income tax.

Self-employed people usually make quarterly estimated tax payments to the IRS (in April, June, September, and January) rather than having taxes withheld from a paycheck. If you do not pay enough throughout the year, you may owe a penalty when you file your return, even if you are owed a refund overall.

How to read your pay stub

Your pay stub shows gross pay (what you earned before taxes), then lists each tax withheld: federal income tax, Social Security tax (labeled OASDI or Social Security), Medicare tax, and any state or local taxes. The stub also shows year-to-date totals, so you can track how much you have paid in each tax category since January.

If your Social Security tax stops appearing partway through the year, that is normal — you have hit the yearly cap. Medicare tax will continue all year. Federal income tax withholding continues all year unless you have claimed exemption on your W-4 (which is rare and requires specific conditions).

If the federal income tax withheld seems too high or too low compared to previous paychecks, your employer may have processed a new W-4 you submitted, or payroll may have made an error. Check with your HR or payroll department to confirm your W-4 is on file correctly.

Employment tax versus income tax: what is the difference

Employment tax is the specific term for Social Security and Medicare tax. Income tax usually refers to federal income tax, though states and some cities also collect income tax. When people say "payroll tax," they mean employment tax plus federal income tax — everything withheld from your paycheck.

Employment tax funds Social Security (retirement, disability, and survivor benefits) and Medicare (health insurance for people 65 and older, and some younger people with disabilities). Federal income tax goes into the general Treasury and funds all federal government operations. They are collected together but go to different places and fund different programs.

State and local income taxes are separate from both. Some states have no income tax; others tax wages at rates from 1% to over 13%. Your pay stub will show state and local withholding if your state or city collects it.

Why employment tax amounts change year to year

The Social Security earnings cap increases most years because average wages grow. In 2023, the cap was $160,200; in 2024, it is $168,600. If you earn close to the cap, you may pay Social Security tax for only part of the year, then stop once you hit the limit. This is why your pay stub shows $0 for Social Security tax in December even though you are still working.

Federal income tax withholding can change if you update your W-4, get a raise, take a second job, or have a major life change. It also changes if Congress adjusts tax brackets or the standard deduction, though this happens rarely. The IRS updates its withholding tables each year to account for inflation.

If you owed taxes or got a large refund last year, that is a sign your W-4 needs adjustment. The IRS withholding calculator can help you figure out what to claim to get closer to breaking even at tax time.

Frequently Asked Questions

Why do I pay Social Security tax if I will not retire for 30 years?

Social Security tax funds current retirees and disabled workers, not just your own future benefits. The program works on a pay-as-you-go system: your taxes today pay for today's beneficiaries. When you retire, future workers' taxes will pay your benefits. You also build a record of earnings that determines how much you receive.

Can I opt out of Social Security or Medicare tax?

No. Employment tax is mandatory for all employees and self-employed workers. Some religious groups have limited exemptions from Social Security tax if they meet specific IRS criteria, but this is rare and requires advance approval. Otherwise, there is no legal way to avoid these taxes.

What happens if my employer does not withhold employment tax?

You are still responsible for the tax, even if your employer fails to withhold it. Report the problem to your state labor department or the IRS. If your employer does not pay the withheld taxes to the government, you may still owe the tax yourself, though you may have a claim against your employer for the money.

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

You get a refund for overpaid federal income tax when you file your return. Social Security and Medicare tax are not refundable — you pay them to fund those programs. If you overpaid because of an error, contact the IRS or your employer to correct it.

How much employment tax will I pay this year?

That depends on your income, filing status, and what you claim on your W-4. Use the IRS withholding calculator at irs.gov to estimate your federal income tax. For Social Security and Medicare, multiply your expected gross income by 6.2% (up to $168,600) and 1.45% respectively. Self-employed workers should use Schedule SE to calculate self-employment tax.