Payroll tax is money withheld from your paycheck for Social Security, Medicare, and federal income tax

Payroll tax is not one tax — it is three separate taxes taken from your wages before you see the money. The first is Social Security tax, which funds retirement and disability benefits. The second is Medicare tax, which funds hospital insurance. The third is federal income tax withholding, which is an advance payment on your annual income tax bill. Your employer withholds all three and sends them to the IRS on your behalf.

The amount withheld depends on how much you earn, how often you are paid, and what you claim on Form W-4. Unlike income tax withholding, which varies by person, Social Security and Medicare tax rates are the same for everyone — but only up to a certain income level for Social Security.

Key Takeaways

  • Social Security tax is 6.2% of your wages, and Medicare tax is 1.45%, for a combined 7.65% in FICA taxes that your employer also matches.
  • Federal income tax withholding is separate from FICA and depends on your W-4 form, your income, and your filing status.
  • Social Security tax stops being withheld once you earn $168,600 in a calendar year, but Medicare tax continues on all wages.
  • Your employer withholds these taxes from each paycheck and sends them to the IRS, so the amount you receive is your gross pay minus these deductions.
  • You can adjust federal income tax withholding by filing a new W-4 with your employer if you are having too much or too little taken out.

Social Security and Medicare tax rates

Social Security and Medicare taxes together are called FICA taxes (Federal Insurance Contributions Act). Your employer withholds 6.2% of your gross wages for Social Security and 1.45% for Medicare, totaling 7.65%. Your employer also pays an equal 7.65% on your behalf — you do not see this amount, but it counts toward the total Social Security and Medicare system.

The Social Security portion (6.2%) only applies to wages up to a certain limit. In 2024, that limit is $168,600. Once you earn that much in a calendar year, your employer stops withholding Social Security tax for the rest of the year. Medicare tax, however, has no wage limit — it is withheld on all your earnings. If you earn more than $200,000 as a single filer (or $250,000 if married filing jointly), an additional 0.9% Medicare tax is withheld on the excess.

Federal income tax withholding

Federal income tax withholding is separate from FICA and is based on information you provide on Form W-4. The amount withheld depends on your filing status, the number of dependents you claim, and any additional income or deductions you expect. Your employer uses IRS withholding tables to calculate how much to take from each paycheck.

Unlike Social Security and Medicare, which have fixed rates, income tax withholding is meant to match your actual tax bill at the end of the year. If you claim too many dependents on your W-4, too little will be withheld and you may owe money when you file. If you claim too few, too much will be withheld and you will receive a refund. You can update your W-4 at any time by submitting a new form to your employer's payroll department.

How to read your pay stub

Your pay stub shows what was withheld from your paycheck. Look for these line items: gross pay (your total earnings before deductions), Social Security tax (labeled as "SS" or "OASDI"), Medicare tax (labeled as "Med" or "EE Medicare"), and federal income tax (labeled as "FIT" or "Federal"). The sum of these deductions, plus any state or local taxes, is subtracted from your gross pay to give you your net pay — the amount you actually receive.

If you notice the withholding amounts seem wrong, check your W-4 first. If you recently changed jobs, got married, had a child, or had a major change in income, your withholding may no longer match your situation. You can file a new W-4 with your employer to adjust it. Keep your pay stubs for the year — you will need them if you have questions about your taxes or if you need to verify your income.

Self-employed payroll tax

If you are self-employed, you pay both the employee and employer portions of Social Security and Medicare tax. This is called self-employment tax and is calculated on Schedule SE. The rate is 15.3% (12.4% for Social Security on net earnings up to $168,600, and 2.9% for Medicare on all net earnings). You pay this when you file your tax return, not through paycheck withholding.

Self-employed people do not have federal income tax withheld automatically. You may need to make quarterly estimated tax payments to avoid owing a large amount when you file. Form 1040-ES shows you how to calculate these payments based on your expected annual income.

State and local payroll taxes

In addition to federal payroll taxes, most states and some cities withhold income tax from your paycheck. The rates and rules vary widely by location. Some states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming). Others withhold a percentage of your wages similar to federal withholding.

Your pay stub will show state and local tax withholding separately from federal. If you work in a state different from where you live, you may owe tax to both states, though most states have agreements to prevent double taxation. Check your state's tax authority website or your pay stub to understand what is being withheld.

What happens to withheld payroll taxes

Your employer sends the Social Security, Medicare, and federal income tax withheld from all employees' paychecks to the IRS on a regular schedule — usually monthly or semi-weekly, depending on the size of the payroll. These taxes fund Social Security retirement and disability benefits, Medicare hospital insurance, and the general operations of the federal government.

When you file your tax return, the IRS compares the total federal income tax withheld during the year (shown on your W-2 form) to your actual tax bill. If too much was withheld, you receive a refund. If too little was withheld, you owe the difference. Social Security and Medicare taxes are not refundable — they go directly into those programs regardless of your income level.

Frequently Asked Questions

Why is my paycheck so much smaller than my hourly rate times hours worked?

Your gross pay is reduced by federal income tax withholding, Social Security tax (6.2%), Medicare tax (1.45%), and usually state and local taxes. Together these can reduce your take-home pay by 20% to 30% or more, depending on your income level and location. Your pay stub itemizes each deduction so you can see where the money goes.

Can I stop Social Security and Medicare tax from being withheld?

No. Social Security and Medicare taxes are mandatory for all employees and self-employed people. You cannot opt out or reduce the withholding rate. The only way to reduce the amount is to earn less, or if you are self-employed, to reduce your net business income through legitimate business expenses.

What if my employer withheld the wrong amount of payroll tax?

Report it to your employer's payroll department when ready. They can correct it on your next paycheck or adjust future withholding. If the error is not fixed, you will see the discrepancy on your W-2 form at the end of the year. You can then contact the IRS or file an amended return if necessary, but it is faster to have your employer fix it right away.

Do I get back the Social Security and Medicare taxes I paid?

Social Security and Medicare taxes are not refundable like income tax. They fund those programs directly. However, you do receive benefits from them later — Social Security retirement benefits when you reach full retirement age, and Medicare coverage at age 65. If you die before collecting, your family may be may have access to to survivor benefits.

How do I know if my federal income tax withholding is correct?

Use the IRS Withholding Estimator tool on IRS.gov, or review your last tax return. If you owed money or received a large refund, your withholding was off. You can file a new W-4 with your employer to adjust it. The goal is to have roughly the right amount withheld so you do not owe or overpay at tax time.