Payroll taxes are the money your employer takes from your paycheck and sends to the federal government

When you see your paycheck, the gross amount (what you earned) is larger than the net amount (what you take home). The difference includes federal income tax withholding, Social Security tax, and Medicare tax. These three deductions are payroll taxes. Your employer is required by law to withhold these amounts, hold them, and send them to the U.S. Treasury and Social Security Administration on your behalf.

Payroll taxes are separate from income tax you might owe at the end of the year. They are deducted automatically from every paycheck, and your employer matches a portion of Social Security and Medicare taxes — meaning the employer pays an equal amount on top of what comes out of your pay.

Key Takeaways

  • Payroll taxes include federal income tax withholding, Social Security tax (6.2% of your wages), and Medicare tax (1.45% of your wages).
  • Your employer withholds these amounts from your paycheck and sends them to the government; you do not pay them directly.
  • Your employer also pays matching Social Security and Medicare taxes on your behalf, which do not appear on your paycheck.
  • The amount withheld for federal income tax depends on the W-4 form you fill out when you start a job, and you can change it anytime.
  • Self-employed people pay both the employee and employer portions of Social Security and Medicare taxes, called self-employment tax.

The three parts of payroll tax and how much comes out

Federal income tax withholding is the largest deduction for most workers. The amount depends on your income, filing status (single, married, head of household), and the answers you give on Form W-4 when you start a job. You can change your W-4 anytime if your situation changes — for example, if you get married, have a child, or take a second job. The IRS uses your W-4 to calculate how much to withhold from each paycheck so that by the end of the year, you have paid roughly what you owe.

Social Security tax is 6.2% of your wages, up to a cap. In 2024, you stop paying Social Security tax once your wages reach $168,600 for the year. After that point, no more Social Security tax is withheld from your remaining paychecks that year. Your employer pays an additional 6.2%, so the total Social Security contribution is 12.4% — half from you, half from your employer.

Medicare tax is 1.45% of all your wages, with no cap. Unlike Social Security, you pay Medicare tax on every dollar you earn, no matter how much you make. Your employer pays an additional 1.45%. If your income exceeds $200,000 (single) or $250,000 (married filing jointly), an extra 0.9% Medicare tax is withheld from your pay.

Why payroll taxes exist and where the money goes

Social Security and Medicare taxes fund two federal programs: Social Security retirement and disability benefits, and Medicare health insurance for people 65 and older. When you work, you build credits toward these programs. The federal income tax withholding goes into the general Treasury to fund federal government operations.

Your payroll tax record is tracked by your Social Security number. The Social Security Administration keeps a record of how much you have paid in Social Security and Medicare taxes throughout your working life. This record determines how much you can receive in Social Security benefits later and whether you are covered by Medicare at 65.

How to read your paycheck stub and verify withholding

Your paycheck stub (or pay stub) shows the gross amount, each deduction, and the net amount you receive. Look for line items labeled "Federal Income Tax," "Social Security," "Medicare," or "FICA" (which stands for Federal Insurance Contributions Act — the law that created payroll taxes). The stub also shows year-to-date totals, so you can see how much has been withheld so far this year.

If you notice the withholding seems wrong — for example, too much is being taken out and you expect a large refund, or too little is being taken out and you might owe money — you can adjust your W-4. You do not need to wait until tax time. Contact your employer's payroll or human resources department and ask for a new W-4 form. You can also download Form W-4 from the IRS website and submit it to your employer directly.

Self-employment tax: what changes if you are self-employed

If you are self-employed (a freelancer, contractor, or business owner), you do not have an employer to withhold payroll taxes. Instead, you pay self-employment tax, which combines both the employee and employer portions of Social Security and Medicare taxes. Self-employment tax is 15.3% of your net business income: 12.4% for Social Security (up to the annual cap) and 2.9% for Medicare.

Self-employed people pay self-employment tax when they file their annual tax return using Schedule SE (Self-Employment Tax). You can deduct half of your self-employment tax as a business expense, which reduces your taxable income. Many self-employed people also make quarterly estimated tax payments to the IRS to cover federal income tax, Social Security, and Medicare taxes throughout the year, rather than paying it all at once when they file.

What happens if you have multiple jobs

If you work more than one job, each employer withholds federal income tax and payroll taxes based on the W-4 you give them. This can create a problem: if you earn enough across both jobs to exceed the Social Security wage cap, you might overpay Social Security tax. The IRS allows you to claim a credit for excess Social Security tax paid when you file your return.

To avoid overwithholding federal income tax when you have multiple jobs, you can adjust your W-4 at one or both jobs. Some people choose to have extra federal income tax withheld at one job to account for income from the other. The IRS website has a withholding calculator that can help you figure out the right W-4 entries for your situation.

Frequently Asked Questions

Can I stop paying payroll taxes?

No. Payroll taxes are mandatory for all employees and self-employed people. Your employer is required by law to withhold them. The only way to reduce payroll taxes is to earn less income or to claim certain deductions (like contributions to a traditional 401(k)) that lower your taxable wages.

What is the difference between payroll taxes and income tax?

Payroll taxes (Social Security and Medicare) fund specific federal programs and have set rates and caps. Federal income tax withholding is based on your W-4 and funds general government operations. Both are withheld from your paycheck, but they go to different places and serve different purposes.

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

Social Security and Medicare taxes are not refundable — they are contributions to those programs. If too much federal income tax was withheld, you receive a refund when you file your tax return. You can adjust your W-4 anytime to change how much federal income tax is withheld going forward.

Why does my paycheck show FICA taxes?

FICA stands for Federal Insurance Contributions Act, the law that created Social Security and Medicare taxes. Employers use "FICA" as shorthand on pay stubs to refer to Social Security and Medicare taxes combined. It is the same as payroll tax.