Payroll Tax

What Is Payroll Tax? 

Payroll tax is a tax that employees and employers pay for their salaries, wages, or tips. For employees, employers withhold taxes from employees’ paychecks and pay to the government. State, federal, and local income taxes are included under these taxes. Additionally, the employee’s share of Social Security and Medicare taxes, which is known as the FICA (Federal Insurance Contributions Act) tax, also consists of and must be paid to the federal government. 

Employers pay their share of payroll tax directly. They pay not only state unemployment taxes but also their part of FICA. The general fund of the US Treasury receives the federal income tax. Generally, federal authorities and some state governments collect the payroll taxes. So, some state governments impose income taxes as well.  

By using payroll tax, the government spends some dedicated programs, such as compensation for workers, social work, or healthcare. Local government also utilizes this payroll tax by improving the road condition or infrastructure. 

How much is payroll tax? 

In the US, both employees and employers have to pay 7.65% each as a portion of their Medicare and Social Security. Employees need to pay 1.45% for Medicare and 6.2% for Social Security out of their share of 7.65%. While the total Medicare tax is 2.9%, the Social Security tax amount is 12.4%, which is paid by employees and employers combined. There is no particular rate of unemployment tax. The self-employment tax rate (15.3%) is equal to Medicare and Social Security. 

Who Needs to Pay Payroll Tax? 

Employees, as well as employers, pay payroll tax. While payroll tax is deducted from the salaries or wages of the employees, employers pay directly to the federal government. 

Limits of wages for payroll tax: 

There is no wage limit for payroll tax except the Social Security tax. In 2025, the base limit is $176,100.