Payroll tax is money your employer withholds from your paycheck and sends to federal and state governments on your behalf

When you earn a wage or salary, your employer removes payroll tax before you see the money. That removed amount goes to the IRS and your state revenue department. The employer also pays a matching amount directly to the government — you do not see that part, but it comes from the money budgeted for your position.

Payroll tax funds three programs: Social Security, Medicare, and federal income tax withholding. Your state may also collect income tax the same way. The amount withheld depends on how much you earn, how often you are paid, what you claimed on your W-4 form, and your filing status.

The withholding is not a loan or a penalty. It is a prepayment toward taxes you will owe at the end of the year. If too much is withheld, you get a refund. If too little is withheld, you owe when you file.

Key Takeaways

  • Social Security tax is 6.2 percent of your gross pay, and Medicare tax is 1.45 percent, with your employer matching both amounts.
  • Federal income tax withholding is calculated using your W-4 form, your pay frequency, and IRS withholding tables that change each year.
  • Your employer sends withheld payroll tax to the IRS and your state within one to three business days of payday, depending on the amount and the employer's size.
  • The amount withheld is an estimate; you settle the actual amount owed when you file your tax return in April.

How Social Security and Medicare tax are calculated

Social Security and Medicare are FICA taxes — Federal Insurance Contributions Act. They are fixed percentages of your gross pay, meaning they explore to your full salary before any deductions.

Social Security tax is 6.2 percent of your gross pay, up to a wage cap that changes each year. In 2024, the cap is $168,600, so once you earn that much in a calendar year, no more Social Security tax is withheld from your remaining paychecks. Medicare tax is 1.45 percent of your gross pay with no cap — it applies to every dollar you earn. If you earn over $200,000 (single) or $250,000 (married filing jointly), an additional 0.9 percent Medicare tax applies to the income above that threshold.

Your employer withholds these amounts and also pays an equal amount to the government. So if you earn $1,000 and $62 in Social Security tax is withheld from your check, your employer also sends $62 to Social Security on your behalf.

How federal income tax withholding is calculated

Federal income tax withholding is not a fixed percentage like FICA. Instead, it is calculated using three pieces of information: your W-4 form, your pay frequency, and IRS withholding tables.

When you start a job, you fill out a Form W-4, which tells your employer how much federal tax to withhold. The form asks for your filing status (single, married, head of household), the number of dependents you claim, and any additional withholding you want. If you have a spouse who also works, the form has a section to account for that. The IRS updates the W-4 and the withholding tables each year, usually in January.

Your employer uses your W-4 answers and the current IRS tables to calculate withholding based on your pay frequency. If you are paid weekly, the calculation is different than if you are paid biweekly or monthly, because the tables assume different annual totals. The more frequently you are paid, the smaller each withholding is, even if your annual salary is the same.

You can change your W-4 at any time by submitting a new form to your employer's payroll department. If you expect a large refund, you can claim more dependents or request less withholding. If you expect to owe, you can request additional withholding.

State and local income tax withholding

Most states collect income tax the same way the federal government does — through payroll withholding. Your employer removes state income tax from your paycheck and sends it to your state revenue department. Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages).

State withholding is calculated similarly to federal withholding, using a state W-4 or equivalent form. Some states use the federal W-4 information; others require a separate state form. The percentage and calculation method vary by state. Some states have a flat tax rate; others use brackets like the federal system.

A few cities also collect local income tax — Philadelphia, Columbus, and some others. If you work in a city with local income tax, your employer withholds that as well. You may need to file a local tax return in addition to your federal and state returns.

When and how your employer sends payroll tax to the government

Your employer does not hold onto the money withheld from your paycheck. Federal law requires employers to deposit payroll tax within one to three business days of payday, depending on how much tax is owed and the employer's size. Large employers typically deposit daily or weekly. Smaller employers may deposit less frequently.

The employer uses the IRS Electronic Federal Tax Payment System (EFTPS) or an approved third-party payroll processor to send the money. The employer also files a quarterly form, the Form 941, which reports total wages paid, total tax withheld, and employer tax paid for the quarter. At the end of the year, the employer files Form 940, which reports federal unemployment tax (a separate tax the employer pays, not withheld from your check).

Your employer sends you a Form W-2 by January 31 each year, showing your gross pay and all taxes withheld. You use this form to file your own tax return.

Why withholding does not always equal what you actually owe

Payroll withholding is an estimate based on the information on your W-4 and the assumption that your pay stays the same throughout the year. If your situation changes, the withholding may not match what you actually owe.

You might have too much withheld if you get a raise mid-year, if you have a second job that ends, if you claim dependents you do not actually support, or if you request extra withholding. Too much withholding means you will get a refund when you file your tax return.

You might have too little withheld if you have a second job, if you have investment income, if you are self-employed and also work as an employee, or if you claim fewer dependents than you should. Too little withholding means you will owe money when you file. If you owe a large amount, you may also owe a penalty for underpayment.

You settle the actual amount owed when you file your tax return in April. The IRS compares the total tax you owe for the year to the total amount withheld and either sends you a refund or bills you for the difference.

Self-employment tax versus payroll tax

If you are self-employed — meaning you work for yourself and do not have an employer — you do not pay payroll tax. Instead, you pay self-employment tax, which covers both the employee and employer portions of Social Security and Medicare.

Self-employment tax is 15.3 percent of your net business income (12.4 percent for Social Security, 2.9 percent for Medicare), compared to 7.65 percent withheld from an employee's paycheck. You pay this tax when you file your annual tax return, usually in quarterly installments if you expect to owe more than $1,000.

Self-employed people do not have an employer to withhold federal income tax, so they must estimate their income tax liability and pay it quarterly using Form 1040-ES. This is different from payroll withholding, where the employer handles the timing.

Frequently Asked Questions

Why does my paycheck show different withholding amounts each pay period?

If your pay varies — for example, if you earn commission or overtime — the withholding changes with it. Withholding is calculated on each individual paycheck based on that check's gross amount. If one week you earn $1,000 and the next week $1,500, the withholding will be higher the second week. Bonuses and lump-sum payments also trigger higher withholding.

Can I stop payroll tax from being withheld?

No. Payroll tax withholding is required by law; your employer must withhold it. You can reduce the amount by changing your W-4 to claim more dependents or request less withholding, but you cannot eliminate it entirely. If you claim too many dependents to avoid withholding, the IRS may penalize you and adjust your withholding by force.

What happens if my employer does not send my withheld tax to the government?

The IRS still expects you to pay. If your employer fails to deposit payroll tax, you are not liable for penalties, but you are still responsible for the tax itself. The IRS will pursue the employer for the unpaid amount. If the employer goes out of business, you may be able to claim a loss on your tax return, but you should contact the IRS when ready if you suspect this has happened.

Do I get credit for payroll tax withheld if I did not work the whole year?

Yes. Payroll tax withheld is credited toward your tax liability regardless of when you earned it. If you worked only part of the year and too much was withheld, you will receive a refund. If too little was withheld, you will owe, but only on the income you actually earned.

How do I know if the right amount is being withheld?

You can use the IRS Withholding Estimator on the IRS website to compare your expected tax liability to your expected withholding. If the numbers do not match, you can adjust your W-4. Many people do this once a year, usually after filing their tax return and seeing whether they got a large refund or owed a large amount.