Payroll taxes refer to taxes taken from an individual’s wages paid for work performed, along with matching amounts employers pay. These taxes are required at the federal level and often at the state and local levels as well.
Why does this matter to you and to us? Because payroll taxes directly affect employees’ paychecks, employer payroll taxes, and overall tax liability. Whether you earn hourly wages, manage small employers, or work with independent contractors, these rates shape budgeting, compliance, and cash flow in very real ways, and this is where BSI helps businesses stay compliant, accurate, and on track as payroll rules evolve.
Below, we explain how the federal payroll tax works, how it connects to earned income, and how programs like Social Security, Medicare, and unemployment tax are funded by both employers and employees. We’ll also touch on federal tax withholding, wage limits, and where confusion usually creeps in.
Key Takeaways
- Payroll taxes apply to earned income and fund Social Security, Medicare, and unemployment programs.
- FICA includes Social Security, with a wage cap, and Medicare with no income limit.
- Employers must match employee payroll taxes and pay additional unemployment taxes.
- High earners may owe Additional Medicare Tax after crossing income thresholds.
- Self-employed workers pay both shares through the self-employment tax.
- BSI’s TaxFactory™ and ComplianceFactory™ help businesses manage payroll tax accuracy, compliance, and filings.
What Payroll Taxes Are in the United States
Definition of Payroll Taxes
Payroll taxes are taxes based on earned income, including wages, cash wages, tips, bonuses, and other compensation paid during a pay period. In plain language, if you worked for it and got paid for it, payroll taxes usually apply.
Payroll taxes refer specifically to taxes tied to work, not to investment income or capital gains. They are different from federal income taxes, which are based on taxable income after deductions like the standard deduction and tax credits. Payroll taxes are calculated using fixed rates and are tied to specific federal programs administered by agencies like the Social Security Administration and overseen by the Internal Revenue Service.
Who Payroll Taxes Apply to
Payroll taxes apply broadly, but not identically, across the workforce.
Employees pay payroll taxes through federal withholding and state withholding, which show up as deductions on employees’ paychecks. These amounts are calculated using withholding forms such as Form W-4, which new employees complete when they start a job.
Employers pay payroll taxes as well. In many cases, employers pay both the employer portion and handle the employee portion through tax withholding. These employer contributions are required even if a business is small or operating on thin margins.
Self-employed individuals and independent contractors are also subject to payroll-style taxes, although they pay them differently since there is no employer match.
2026 Social Security Wage Base and FICA Rates
For the 2026 tax year, the Social Security tax rate remains at 6.2% for both employees and employers, and the Medicare tax rate stays at 1.45% each for employees and employers as well, under the Federal Insurance Contributions Act (FICA).
The Social Security wage base limit for 2026 is $184,500, meaning only the first $184,500 of earned income is subject to the 6.2% Social Security tax; once you hit that wage base in a calendar year, you stop paying Social Security tax for the rest of the year.
Medicare tax applies to all covered wages with no cap. In addition, the Additional Medicare Tax of 0.9% still applies to wages over $200,000 in a year.
Federal Payroll Taxes Explained
Overview of FICA Taxes
Most federal payroll taxes fall under the Federal Insurance Contributions Act, often shortened to FICA. You’ll also see these referred to as federal insurance contributions, or FICA taxes, on IRS forms and payroll reports.
FICA taxes fund Social Security and Medicare, two programs run by the federal government that provide retirement income, disability insurance, survivor benefits, and access to health care services. These programs are not optional, and funding them depends on consistent payroll tax collection across every calendar year.
Components of FICA
FICA is split into two main parts, each with its own tax rate and rules.
The Social Security tax supports retirement and disability benefits managed by the Social Security Administration. It applies only to covered wages up to an annual wage base limit, sometimes called the wage limit or wage base.
The Medicare tax funds hospital and medical insurance and applies to all covered wages with no maximum.
Social Security Payroll Tax Rate
Employee Share of Social Security Tax
Employees pay the employee portion of the Social Security tax through federal tax withholding. The employee Social Security tax is calculated as a percentage of wages earned during each pay period.
That withholding reduces take-home pay immediately. The Social Security tax rate stays the same throughout the tax year, until wages reach the maximum Social Security tax threshold set for that calendar year.
Employer Share of Social Security Tax
Employers pay the same amount of Social Security tax as their workers. This is referred to as the employer match.
This cost does not come out of wages. It is part of the combined employer payroll taxes and must be paid even when profit margins are tight or labor costs rise.
Social Security Wage Base Limit
The wage base, also called the annual wage base limit, caps how much income is subject to Social Security tax. Once wages reach this point, Social Security withholding stops for the rest of the year.
This cap also limits the maximum Social Security tax a worker can pay, which is why higher earners eventually see a change in withholding. Earnings above the wage base are still subject to Medicare tax, but not Social Security.
Medicare Payroll Tax Rate
Standard Medicare Tax for Employees
The Medicare tax rate applies to all wages, with no income ceiling. Every dollar of earned income is subject to Medicare tax withholding.
This tax funds ongoing health care services and hospital insurance. Because there is no wage limit, higher earners continue paying Medicare tax all year long.
Employer Medicare Contribution
Employers pay a matching Medicare tax on employee wages. Like Social Security, this is an employer contribution that does not reduce employee pay directly.
From a business standpoint, employers pay this tax consistently across all wages, making it a predictable but unavoidable cost.
How Medicare Payroll Taxes Differ from Social Security
The biggest difference is the wage cap. Social Security has one. Medicare does not.
There’s also a difference in purpose. Social Security replaces income in retirement or disability, while Medicare focuses on healthcare coverage later in life.
Additional Medicare Payroll Tax
What Triggers the Additional Medicare Tax
The additional Medicare tax applies when wages exceed certain thresholds based on filing status, such as single, married filing jointly, or married filing separately.
This tax applies only to wages above the threshold, not to total income. Employers must begin withholding once an employee crosses the threshold, regardless of household income.
Who Pays This Tax
Only employees pay the additional Medicare tax. Employers do not match it, even though employers handle the withholding.
This often causes confusion, especially for high earners whose withholding increases late in the tax year.
How This Tax Affects High Earners
For high-income employees, this tax raises the effective payroll tax rate on wages above the threshold. It can increase overall tax liability and reduce net pay.
A common misunderstanding is thinking both the employer and employee share this tax. They don’t. This is an employee-only obligation.
Total Payroll Tax Rate for Employees
Payroll Tax Rate Below the Social Security Cap
Below the wage base, employees pay both Social Security tax and Medicare tax. Combined, these payroll tax rates apply evenly to each paycheck.
Because these rates are flat, the total payroll tax rate stays consistent until the wage limit is reached.
Payroll Tax Rate Above the Additional Medicare Threshold
Above the additional Medicare threshold, the total payroll tax rate increases slightly.
This increase only applies to wages above the threshold, which explains why take-home pay may drop later in the year even when hourly wages or salaries stay the same.
Payroll Tax Rate for Employers
Required Employer Contributions
Employers pay Social Security and Medicare taxes for each employee. These employer payroll taxes are required regardless of company size.
In addition, employers are responsible for paying unemployment taxes at the federal and state levels.
Cost Implications for Businesses
Payroll taxes affect hiring decisions, pricing, and payroll structure. For small employers, especially, employer contributions can significantly increase labor costs.
Employers must also budget for state income tax withholding, local taxes, and compliance with federal minimum wage and state minimum wage laws.
Payroll Tax Rate for Self-Employed Individuals
Why Self-Employed Workers Pay Both Employee and Employer Taxes
Self-employed workers pay both the employer and employee portions of payroll taxes because there is no employer to split the cost.
This structure ensures contributions to Social Security and Medicare are consistent across the workforce.
Self-Employment Tax Rate Explained
The self-employment tax rate combines Social Security and Medicare obligations. Social Security applies up to the wage base, while Medicare applies to all net earnings.
This combined rate reflects what employers and employees together would normally pay.
Deducting the Employer-Equivalent Portion
Self-employed individuals can deduct the employer-equivalent portion of self-employment tax when calculating taxable income.
This deduction lowers federal income and reduces income tax, but it does not reduce payroll tax itself.
Other Federal Payroll-Related Taxes Employers Pay
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act, or FUTA, funds unemployment benefits at the federal level. This is a federal unemployment tax paid only by employers.
It applies to a limited amount of wages per employee per year and supports unemployment tax programs.
How Payroll Tax Rates Affect Take-Home Pay
Payroll Tax Withholding on Paychecks
Payroll tax withholding reduces gross pay before money hits your account. Social Security, Medicare, and sometimes additional withholding are deducted automatically.
These deductions occur every pay period and are based on wages and tax rules.
Effective Payroll Tax Rate Over a Full Year
Over a tax year, payroll taxes can change. Social Security stops after the wage base is reached. Additional Medicare may start later.
This is why employees’ paychecks often change between January and December.
How BSI Supports Accurate Payroll Tax Management
Understanding payroll tax rates is one thing; managing them correctly across jurisdictions is another. This is where BSI’s TaxFactory™ and ComplianceFactory™ solutions fit naturally into the picture. We help businesses calculate, withhold, file, and remit payroll taxes accurately at the federal, state, and local levels.
These solutions are designed to handle complex payroll tax rules, frequent rate changes, and multi-state requirements without slowing payroll operations down. For employers facing growing compliance risk or limited internal resources, we provide scalable payroll tax automation and expert support that reduces errors and keeps payroll on track.
Wrapping Up Payroll Tax Rates
Payroll tax rates determine how much employers and employees contribute to Social Security, Medicare, and unemployment programs. Employers pay, employees pay, and both the employer and worker fund various programs together.
Understanding payroll tax rates helps you plan wages, manage tax liability, and stay compliant with federal, state and local tax rules. When situations involve legal services, complex filings, IRS forms, Form W, transmittal forms, or filing status questions, professional guidance can make all the difference.
If you have questions about payroll tax rates or how payroll taxes affect your business, don’t hesitate to reach out. BSI helps employers calculate, withhold, and file payroll taxes accurately while reducing compliance risk. Whether you’re dealing with growth, complexity, or just want peace of mind, the BSI team is happy to help you find the right approach.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered accounting, tax, or payroll advice. Always consult a qualified professional for guidance specific to your business or situation.
