Payroll tax is money your employer takes from your paycheck and sends to the federal government

Payroll tax funds Social Security and Medicare. Your employer withholds it before you see your paycheck — you never receive that money. The amount depends on your income and filing status, and it changes each year because the government adjusts the rates and income thresholds.

There are two main payroll taxes: Social Security tax (6.2% of your wages) and Medicare tax (1.45% of your wages). Your employer also pays an equal amount on your behalf, though you do not see that deduction. Self-employed people pay both the employee and employer portions, which is why their rate is higher.

Payroll tax is separate from income tax. Income tax also comes out of your paycheck, but it goes to the general federal budget. Payroll tax is dedicated — it can only be used for Social Security and Medicare benefits.

Key Takeaways

  • Payroll tax is withheld from your paycheck by your employer and covers Social Security (6.2%) and Medicare (1.45%).
  • Your employer pays an equal amount on your behalf that you do not see on your paycheck.
  • Payroll tax is separate from income tax and can only fund Social Security and Medicare, not general government spending.
  • Self-employed workers pay both the employee and employer portions of payroll tax, totaling 15.3% for Social Security and Medicare combined.
  • The amount withheld changes yearly because income thresholds and tax rates are adjusted by Congress.

How much payroll tax comes out of your paycheck

Social Security tax takes 6.2% of your wages, but only up to a certain income limit. That limit changes each year — in 2024 it was $168,600, meaning you stop paying Social Security tax once you earn above that amount. Medicare tax takes 1.45% of all your wages with no income limit, so high earners pay Medicare tax on every dollar.

If you earn $50,000 a year, you pay roughly $3,100 in Social Security tax and $725 in Medicare tax, totaling about $3,825. Your employer pays the same amount. If you earn $200,000, you pay the Social Security cap plus $2,900 in Medicare tax, totaling about $13,168 — and your employer pays the same.

Additional Medicare tax of 0.9% applies if you earn over $200,000 (single) or $250,000 (married filing jointly). This extra tax has no employer match — you pay it alone.

Why payroll tax exists and what it funds

Payroll tax was created in 1935 as the funding mechanism for Social Security. When you pay payroll tax, you are building a record of earnings that determines your Social Security benefit later. The more you earn and pay in, the higher your benefit will be at retirement.

Medicare tax, added in 1965, funds hospital insurance (Part A) and some outpatient care. Like Social Security, your Medicare tax payments create a record that determines your coverage and premiums when you turn 65.

The money does not sit in an account with your name on it. Current workers' payroll taxes pay current retirees' benefits. This is called a pay-as-you-go system. When you retire, future workers' payroll taxes will pay your benefits.

Payroll tax for self-employed workers

If you are self-employed, you pay both the employee and employer portions of payroll tax, called self-employment tax. That means 12.4% for Social Security (up to the income limit) and 2.9% for Medicare, totaling 15.3% before any income tax.

You calculate self-employment tax on your net business income — what you earn after business expenses. You report it on Schedule SE when you file your tax return. You can deduct half of your self-employment tax as a business expense, which lowers your taxable income slightly.

Self-employed workers pay self-employment tax quarterly through estimated tax payments, or they can pay it all when they file their annual return. Many use tax software or a tax professional to calculate the correct amount.

How payroll tax withholding works

Your employer uses a W-4 form to determine how much to withhold from each paycheck. You fill out the W-4 when you start a job, and you can update it anytime — when you marry, have a child, take a second job, or if you owed taxes or got a large refund the previous year.

The W-4 asks about your filing status, number of dependents, and other income. Based on your answers, your employer calculates the withholding using IRS tables. The goal is to withhold roughly the amount of tax you will owe, so you do not owe a large bill or get a large refund at tax time.

If you do not fill out a W-4, your employer must withhold as if you are single with no dependents — the highest withholding rate. This means more money comes out of your paycheck than you may actually owe.

Payroll tax and your Social Security record

Every dollar you pay in payroll tax is recorded under your Social Security number. The Social Security Administration tracks your earnings history for your entire working life. When you turn 62, 67, or 70 (depending on your birth year), you can claim Social Security retirement benefits based on that record.

Your benefit amount is calculated from your 35 highest-earning years. If you have fewer than 35 years of earnings, zeros are counted for the missing years, which lowers your benefit. You must have at least 40 credits of earnings (roughly 10 years of work) to be may be able to access for retirement benefits.

Payroll tax also funds disability and survivor benefits. If you become unable to work, or if you die, your family may receive benefits based on your payroll tax record.

What happens if you do not pay payroll tax

If you are an employee, you cannot avoid payroll tax — your employer is required by law to withhold it. If your employer does not withhold and send it to the IRS, the employer faces penalties and back taxes, and you still owe the tax yourself.

If you are self-employed and do not pay self-employment tax, the IRS can assess penalties and interest. You also lose credits toward Social Security benefits, which means a lower benefit when you retire. The IRS can place a lien on your property or garnish your bank account to collect unpaid tax.

If you believe your employer is not withholding payroll tax correctly, you can report it to the IRS using Form 13909 (Whistleblower Form). You can also contact your state labor department if you suspect wage theft.

Frequently Asked Questions

Can I opt out of paying payroll tax?

No. Payroll tax is mandatory for all employees and self-employed workers. Some religious groups have exemptions from self-employment tax if they meet specific IRS criteria, but this is rare and requires advance approval.

What if I work multiple jobs — do I pay payroll tax on all of them?

Yes. You pay Social Security and Medicare tax on wages from every job. However, if your combined wages exceed the Social Security income limit, you may overpay Social Security tax. You can claim a credit for the overpayment when you file your tax return.

Does payroll tax count toward my income tax?

No. Payroll tax and income tax are separate. Payroll tax funds Social Security and Medicare only. Income tax funds general government operations. Both are withheld from your paycheck, but they go to different places.

What if I did not work long enough to earn 40 Social Security credits?

You will not be may be able to access for Social Security retirement benefits based on your own record. However, you may be may be able to access for spousal or survivor benefits if your spouse or ex-spouse worked long enough. Contact Social Security directly to explore your options.

How do I check how much payroll tax I have paid?

Create an account at ssa.gov and view your Social Security Statement. It shows your earnings history and estimated benefits. You can also call Social Security at 1-800-772-1213 to request a statement by mail.