Payroll tax is the money your employer withholds from your paycheck for Social Security, Medicare, and federal income tax

Payroll tax is not one tax — it is three separate deductions that appear on your pay stub. Social Security tax takes 6.2% of your gross pay (the amount before deductions). Medicare tax takes 1.45% of your gross pay. Federal income tax withholding takes a percentage that depends on your W-4 form and how much you earn. Your employer sends all three to the federal government on your behalf.

The amount that actually leaves your paycheck depends on your income, how often you are paid, and what you claimed on your W-4 when you started the job. A person earning $50,000 per year will see a different amount withheld than someone earning $100,000, even though the percentages for Social Security and Medicare stay the same.

If you are self-employed, you pay both the employee and employer portions of Social Security and Medicare tax yourself — that is 12.4% for Social Security and 2.9% for Medicare on your net business income. Most people who work for an employer only see the employee portion withheld.

Key Takeaways

  • Social Security tax is 6.2% of your paycheck, and Medicare tax is 1.45%, and these amounts are the same for all workers.
  • Federal income tax withholding varies based on your W-4 form and your income level, so two people earning the same salary may have different amounts withheld.
  • Your pay stub shows the exact amount withheld for each tax in every paycheck, so you can track what is being deducted.
  • Self-employed people pay the full 15.3% for Social Security and Medicare combined, because they cover both the employee and employer share.
  • Payroll tax is separate from state income tax and local taxes, which may also be withheld depending on where you live and work.

How Social Security and Medicare tax work

Social Security tax and Medicare tax are fixed percentages that do not change based on your income or personal situation. Every dollar you earn up to a certain limit is subject to Social Security tax. For 2024, that limit is $168,600 — once you earn above that amount in a calendar year, Social Security tax stops being withheld from your paycheck. Medicare tax has no income limit, so it continues on every dollar you earn no matter how much you make.

These taxes fund two federal programs: Social Security provides retirement, disability, and survivor benefits, and Medicare provides health insurance for people 65 and older and some younger people with disabilities. When you pay these taxes, you are building a record of earnings that determines what you will receive from these programs later.

Your employer withholds these amounts and sends them to the Internal Revenue Service (IRS) along with their own matching contribution. You see only the employee portion on your pay stub.

How federal income tax withholding works

Federal income tax withholding is different from Social Security and Medicare tax because the amount depends on information you provide on your W-4 form. When you start a job, you fill out a W-4 to tell your employer how much federal income tax to withhold from each paycheck. The form asks about your filing status, whether you have dependents, and whether you have other income.

The IRS provides a withholding calculator on its website that helps you figure out what to claim. If you claim too many allowances, too little tax is withheld and you may owe money when you file your tax return. If you claim too few, too much is withheld and you will receive a refund. Neither outcome is wrong — it is a choice about whether you want a larger paycheck now or a refund later.

You can change your W-4 at any time by submitting a new form to your employer. Many people adjust their withholding if their life circumstances change — for example, if they get married, have a child, or take a second job.

What your pay stub shows

Your pay stub breaks down exactly what was withheld from your paycheck. It lists your gross pay (total earnings before any deductions), then shows each deduction separately: Social Security tax, Medicare tax, federal income tax withholding, and any state or local taxes. The bottom line is your net pay — the amount you actually receive.

The pay stub also shows year-to-date totals, so you can see how much you have paid in each tax category since January 1st. This is useful for tracking whether your withholding is on track or if you need to adjust your W-4.

If you do not receive a physical pay stub, your employer is required to provide one in some form — either printed, emailed, or through an online portal. You should review it regularly to make sure the deductions are correct.

Payroll tax for self-employed people

If you work for yourself, you pay self-employment tax instead of having an employer withhold payroll tax. Self-employment tax covers both the employee and employer portions of Social Security and Medicare tax. The rate is 15.3% total: 12.4% for Social Security (on net earnings up to $168,600 for 2024) and 2.9% for Medicare (on all net earnings).

You calculate self-employment tax on your net business income — your revenue minus business expenses — and pay it when you file your annual tax return. Many self-employed people make quarterly estimated tax payments to avoid a large bill at tax time. The IRS provides Form 1040-ES to help you calculate what to pay each quarter.

Self-employed people can deduct half of their self-employment tax when calculating their adjusted gross income, which provides some tax relief for paying both portions.

State and local payroll taxes

In addition to federal payroll tax, most states and some cities withhold income tax from your paycheck. The amount varies widely by location. Some states have no income tax at all — including Texas, Florida, and Wyoming — so residents of those states see no state withholding. Other states withhold a percentage similar to federal income tax.

A few cities, including New York City and Washington, D.C., also withhold local income tax. If you work in one of these places, your pay stub will show a separate line for local tax withholding.

You can adjust state and local withholding on a separate form from your federal W-4. If you work in a state different from where you live, you may need to file returns in both places.

Frequently Asked Questions

Why does my paycheck show different amounts withheld each month?

The percentage for Social Security and Medicare stays the same, but the dollar amount changes if your paycheck size changes. Federal income tax withholding can also vary if you receive bonuses, overtime, or irregular pay. If the variation is large and consistent, you may need to adjust your W-4.

What happens if I claim zero on my W-4?

Claiming zero means the maximum federal income tax is withheld from each paycheck. This results in a smaller paycheck but usually a larger tax refund when you file your return. It does not affect Social Security or Medicare tax, which are always 6.2% and 1.45% respectively.

Do I pay payroll tax on tips?

Yes. Tips are considered income and are subject to Social Security, Medicare, and federal income tax withholding. Your employer should include reported tips in your gross pay on your pay stub and withhold taxes accordingly.

Can I avoid paying payroll tax?

No. Payroll tax is required by law for all employees and self-employed people. However, you can adjust your federal income tax withholding on your W-4 to change how much is taken from each paycheck, though this does not reduce the total tax you owe.

What is the difference between payroll tax and income tax?

Payroll tax includes Social Security and Medicare tax, which fund specific federal programs. Income tax is a separate tax on your earnings that funds general government operations. Both are withheld from your paycheck, but they go to different places and fund different things.