Payroll tax is the money taken from your paycheck for Social Security, Medicare, and sometimes state or local taxes

When you look at your pay stub, you see gross pay (what you earned) and net pay (what you take home). The difference includes payroll taxes — money your employer withholds and sends to the government on your behalf. These are separate from income tax. Payroll taxes fund two specific programs: Social Security and Medicare. Your employer also pays an equal amount in payroll taxes for you, though you do not see that deducted from your check.

Payroll tax is mandatory for almost all workers. If you are an employee, your employer handles the withholding. If you are self-employed, you pay both the employee and employer portions yourself, called self-employment tax. Some state and local governments also collect payroll taxes for their own programs, but the federal payroll tax is the same everywhere.

Key Takeaways

  • Federal payroll tax has two parts: 6.2% for Social Security and 1.45% for Medicare, taken from your paycheck each pay period.
  • Your employer pays an equal amount (6.2% Social Security and 1.45% Medicare) that does not appear on your pay stub.
  • Social Security tax stops once you reach the annual wage cap, which changes each year; Medicare tax does not have a cap.
  • Self-employed people pay both the employee and employer portions of payroll tax, totaling 15.3% for Social Security and Medicare combined.
  • Payroll tax is separate from federal income tax and is used only for Social Security and Medicare, not general government spending.

How much payroll tax comes out of your paycheck

The federal payroll tax rate is fixed by law. You pay 6.2% of your wages to Social Security and 1.45% to Medicare, for a combined 7.65%. This is taken from every paycheck before you see the money. Your employer then pays another 7.65% on your behalf — the same percentages — which you do not see but which counts toward your Social Security and Medicare records.

The Social Security portion stops once you reach a wage cap set each year. In 2024, that cap is $168,600, meaning once you earn that much in a calendar year, no more Social Security tax is withheld from your remaining paychecks. The Medicare portion has no cap, so it continues on all wages no matter how much you earn. The wage cap changes annually based on average wage growth, so the amount you stop paying Social Security tax varies by year.

Where payroll tax money goes

Social Security tax funds the Social Security program, which pays retirement benefits, survivor benefits (for family members of workers who die), and disability benefits. Medicare tax funds the Medicare program, which provides health insurance for people 65 and older and some younger people with disabilities. These are not general government funds — payroll tax is dedicated to these two programs only.

When you work, you build a record with the Social Security Administration. Your payroll tax contributions are tracked under your Social Security number. This record determines how much you can receive in Social Security benefits later and whether you meet the work history requirement for Medicare coverage. The amount you paid in does not directly equal what you receive — benefits are calculated using a formula — but your work history and earnings record are essential to receiving either benefit.

The difference between payroll tax and income tax

Payroll tax and federal income tax are two separate deductions on your pay stub. Payroll tax is a fixed percentage (7.65% combined) that goes to Social Security and Medicare. Income tax is withheld based on your W-4 form and varies depending on your income, filing status, and the number of dependents you claim. Income tax goes to the general U.S. Treasury and funds all federal government operations.

You can adjust how much income tax is withheld by changing your W-4 with your employer, but you cannot change the payroll tax rate — it is set by federal law. Some people owe income tax at the end of the year if too little was withheld, or receive a refund if too much was withheld. Payroll tax does not work that way; the amount withheld is final and does not change at tax time.

Self-employment tax and what it covers

If you are self-employed, you pay self-employment tax instead of having an employer withhold payroll tax. Self-employment tax is 15.3% total: 12.4% for Social Security and 2.9% for Medicare. This is double the employee rate because you pay both the employee and employer portions. You calculate self-employment tax on your Schedule SE form when you file your annual tax return, and you may owe it quarterly through estimated tax payments.

Self-employed people can deduct half of their self-employment tax as a business expense on their tax return, which reduces their taxable income. This deduction roughly mirrors the fact that an employer's payroll tax contribution is not counted as income to the employee. Even so, self-employment tax is typically higher than what an employee pays because the self-employed person bears the full cost.

Who pays payroll tax and who does not

Most workers pay payroll tax. Employees, self-employed people, and household workers (like nannies or housekeepers) all pay it. Some groups are exempt: certain religious groups that have filed for exemption, some federal employees hired before 1984, and railroad employees (who pay into a separate railroad retirement system instead). Students employed by their school, children under 18 working for their parents' business, and some other narrow categories may be exempt in specific situations.

If you work for a nonprofit organization, you still pay payroll tax the same way as any other employee. Nonprofit status does not change payroll tax withholding. State and local government employees may have different rules depending on their state, and some may not pay Social Security tax if they are covered by a separate pension system, but they typically pay Medicare tax.

How payroll tax appears on your pay stub

Your pay stub shows gross pay at the top, then lists deductions. You will see a line for Social Security tax (sometimes labeled "OASDI" for Old-Age, Survivors, and Disability Insurance) and a separate line for Medicare tax. These are usually shown as a dollar amount and a percentage. Some pay stubs also show federal income tax withheld, state income tax, and other deductions like health insurance premiums or retirement contributions.

The employer's payroll tax contribution does not appear on your pay stub because it is not deducted from your pay — your employer pays it separately to the government. However, your employer's contribution is recorded in your Social Security earnings record and counts toward your benefits. You can view your earnings record by creating an account on the Social Security Administration website.

Frequently Asked Questions

Why do I pay payroll tax if I will not need Social Security or Medicare?

Payroll tax is mandatory for all workers regardless of whether you plan to use Social Security or Medicare later. The programs are funded through current workers' contributions, and you build a record that may be useful even if you do not expect to use the benefits. Additionally, you cannot predict future circumstances — you may become disabled and may have access to for disability benefits, or your family may may have access to for survivor benefits if something happens to you.

Can I opt out of paying payroll tax?

No, payroll tax is mandatory for employees and self-employed people. The only exemptions are for specific religious groups that have filed for exemption with the IRS, certain government employees, and a few other narrow categories. You cannot choose to stop paying payroll tax to increase your take-home pay.

What happens to payroll tax if I change jobs?

Your payroll tax contributions continue with each new employer. The Social Security Administration tracks all your earnings under your Social Security number across all jobs you have worked. If you change jobs mid-year, you may temporarily pay Social Security tax to two employers until you reach the annual wage cap, but you will not owe extra tax — the excess is refunded when you file your tax return.

Does payroll tax count toward my income tax?

No, payroll tax and income tax are separate. Payroll tax is withheld at a fixed rate and goes to Social Security and Medicare. Income tax is withheld based on your W-4 and goes to the general Treasury. Both appear on your pay stub, but they fund different programs and are calculated differently.

How do I know how much payroll tax I have paid over my lifetime?

You can view your lifetime earnings record and payroll tax contributions by creating a my Social Security account on the Social Security Administration website (ssa.gov). Your earnings record shows how much you have earned and paid in Social Security and Medicare taxes for each year you worked. You can also request a printed statement by mail if you prefer.