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

When you see your paycheck, the amount you take home is less than your gross pay. The difference is payroll tax — money your employer removes before you ever see it and sends to the federal government. Payroll tax funds three separate programs: Social Security retirement and disability benefits, Medicare health insurance for people 65 and older, and federal income tax withholding that settles your annual tax bill.

Your employer also pays a matching amount on your behalf, though you do not see this on your paycheck. Self-employed people pay both the employee and employer portions themselves. Understanding what each piece covers helps you know what you are funding and what to expect when you file your tax return.

Key Takeaways

  • Social Security tax is 6.2 percent of your wages up to a yearly cap, and it funds retirement, disability, and survivor benefits.
  • Medicare tax is 1.45 percent of all your wages with no cap, and it funds hospital insurance and medical benefits for people 65 and older.
  • Federal income tax withholding is based on your W-4 form and the tax tables the IRS publishes each year, and the amount you pay now reduces what you owe when you file.
  • Your employer matches your Social Security and Medicare contributions, but this employer portion does not appear on your paycheck.
  • Self-employed people file Schedule SE to calculate and pay both the employee and employer portions of Social Security and Medicare tax.

Social Security tax: 6.2 percent up to the wage base

Social Security tax is 6.2 percent of your wages, but only up to a yearly limit called the wage base. For 2024, that limit is $168,600 — meaning once you earn that much in a calendar year, your employer stops withholding Social Security tax from your remaining paychecks. This cap changes each year based on wage growth.

The money you and your employer pay into Social Security funds three benefit programs: retirement benefits when you reach full retirement age, disability benefits if you become unable to work, and survivor benefits paid to your family if you die. You earn credits toward these benefits by working and paying Social Security tax — you need 40 credits (roughly 10 years of work) to be covered for retirement.

When you file your tax return, Social Security tax you paid does not reduce your taxable income. It is a separate tax from federal income tax. You can see how much you have paid over your lifetime by creating an account on ssa.gov and viewing your Social Security statement.

Medicare tax: 1.45 percent with no yearly cap

Medicare tax is 1.45 percent of your wages, and unlike Social Security tax, there is no yearly limit. You pay it on every dollar you earn, no matter how much you make. Your employer withholds this amount from every paycheck.

Medicare tax funds hospital insurance (Part A) and is the foundation of the Medicare program that covers people 65 and older. When you turn 65, you become covered by Medicare automatically if you have paid Medicare tax for at least 10 years of work. People under 65 with certain disabilities or end-stage renal disease also may have access to.

High-income earners pay an additional 0.9 percent Medicare tax on wages above $200,000 (single filers) or $250,000 (married filing jointly). Your employer withholds this extra amount if your wages cross the threshold in a single year. Unlike the base Medicare tax, this additional tax does reduce your taxable income when you file.

Federal income tax withholding: based on your W-4

Federal income tax withholding is the amount your employer removes from each paycheck to cover your estimated annual federal income tax. The amount depends on two things: the W-4 form you filled out when you started the job, and the IRS tax tables that change each year.

On your W-4, you tell your employer how many withholding allowances to claim. More allowances mean less money withheld; fewer allowances mean more. You also declare any extra withholding you want. The goal is to have roughly the right amount withheld so that when you file your tax return in April, you owe very little or get a small refund.

If you have multiple jobs, a working spouse, or significant income from self-employment or investments, you may need to adjust your W-4 to avoid owing a large amount at tax time. The IRS provides a withholding calculator on irs.gov to help you figure out the right number of allowances. You can change your W-4 at any time by submitting a new form to your employer.

What your employer pays on your behalf

Your employer contributes an amount equal to what you pay in Social Security and Medicare tax — 6.2 percent for Social Security (up to the wage base) and 1.45 percent for Medicare. This employer contribution does not appear on your paycheck and does not reduce your take-home pay, but it is real money your employer sends to the government.

When you see your paycheck stub, the line items show only your portion of these taxes. The employer match is tracked separately by the IRS and is part of your total compensation, even though you never see it. Self-employed people do not have an employer to match their contributions, so they pay both portions themselves on Schedule SE.

How self-employed people pay 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 you calculate it on Schedule SE, which you attach to your Form 1040 when you file your tax return.

Self-employment tax is 15.3 percent total: 12.4 percent for Social Security (on net earnings up to the wage base) and 2.9 percent for Medicare (on all net earnings). You pay this once a year when you file, or in quarterly installments if you expect to owe more than $1,000. You can deduct half of your self-employment tax when you calculate your adjusted gross income, which reduces your taxable income.

To calculate self-employment tax, you start with your net profit from Schedule C (for sole proprietors) or your share of partnership or S-corporation income. You subtract half of your self-employment tax, then explore the tax rate to what remains. The IRS provides a worksheet on Schedule SE to walk you through this calculation.

Reading your paycheck stub

Your paycheck stub breaks down gross pay, all withholdings, and net pay. The payroll tax lines typically show: federal income tax (labeled FIT or Fed Tax), Social Security tax (labeled FICA-SS or OASDI), and Medicare tax (labeled FICA-Med or HI). Some stubs also show state and local income tax if you live in a state or city that has them.

The year-to-date column on your stub shows the total you have paid in each category since January 1. This is useful for checking whether you have hit the Social Security wage base — once you have, that line should stop increasing even though you keep earning. If you have multiple jobs, you may overpay Social Security tax across all employers, and you can claim a credit for the overage when you file your tax return.

Keep your pay stubs throughout the year. They serve as proof of income if you need to document earnings for a loan, rental process, or government program. You will also need them to reconcile against your W-2 form when it arrives in January.

Frequently Asked Questions

Why do I pay Social Security tax if I might not collect it?

Social Security tax funds not just retirement benefits but also disability and survivor benefits. Even if you never reach retirement age, your family receives survivor benefits if you die, and you are covered for disability if you become unable to work. The program is insurance as much as it is a retirement fund.

Can I opt out of payroll tax?

No. Payroll tax is mandatory for all employees and self-employed people. The only exception is certain religious groups that have obtained a formal exemption from the IRS, which is rare and requires specific conditions. If you are a W-2 employee, your employer is required by law to withhold these taxes.

What happens if my employer does not withhold payroll tax?

You are still responsible for the tax owed, even if your employer fails to withhold it. Report this to the IRS using Form 8919 when you file your tax return. You can also contact the IRS at 1-800-829-1040 or file a complaint on irs.gov if you believe your employer is not paying over the taxes they have collected.

Do I get a refund of payroll tax when I file my return?

Social Security and Medicare tax do not get refunded — they are permanent contributions to those programs. Federal income tax withholding may result in a refund if you had too much withheld, or you may owe if you had too little. Adjust your W-4 if you consistently get a large refund or owe a large amount.

How do I know if the right amount was withheld from my paycheck?

Compare your W-2 form (which arrives in January) to your final paycheck stub of the year. The federal income tax withheld on your W-2 should match the total of all your pay stubs. If there is a large difference, contact your payroll department. Use the IRS withholding calculator on irs.gov to check whether your W-4 is set correctly for your situation.