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

When you see your paycheck, the gross amount (what you earned) is larger than the net amount (what you take home). The difference is payroll taxes — money your employer removes and sends to the federal government on your behalf. These taxes fund three separate programs: Social Security retirement and disability benefits, Medicare health insurance for people 65 and older, and federal income tax withholding.

Your employer is required by law to withhold these amounts. You do not have a choice about whether the money comes out — it is automatic. The withholding is based on information you provide on Form W-4 when you start a job, which tells your employer how much to take out of each paycheck.

Payroll taxes are different from income taxes you might owe at the end of the year. Payroll withholding is money taken during the year; income tax is what you settle when you file your return in April. You may get some of that withheld money back as a refund, or you may owe more.

Key Takeaways

  • Payroll taxes include Social Security tax (6.2 percent of your wages), Medicare tax (1.45 percent), and federal income tax withholding, which varies based on your W-4 form.
  • Your employer withholds these amounts from every paycheck and sends them to the IRS and Social Security Administration, not to you.
  • Self-employed people pay both the employee and employer portion of Social Security and Medicare taxes, called self-employment tax, which totals 15.3 percent.
  • The amount withheld for federal income tax depends on your filing status, number of dependents, and other income — not a fixed percentage like Social Security and Medicare.
  • Payroll taxes are separate from state and local income taxes, which your employer may also withhold depending on where you live and work.

How much comes out of your paycheck for each tax

Social Security tax takes 6.2 percent of your wages, up to a cap that changes each year. In 2024, the cap is $168,600 of annual income — once you earn that much, no more Social Security tax comes out for the rest of the year. This tax funds Social Security retirement, disability, and survivor benefits.

Medicare tax takes 1.45 percent of your wages with no income cap — it comes out of every dollar you earn, no matter how much you make. If your income exceeds certain thresholds (which depend on your filing status), an additional 0.9 percent Medicare tax applies to the amount over that threshold. This tax funds Medicare hospital insurance and other Medicare benefits.

Federal income tax withholding is not a fixed percentage. It depends on what you entered on your W-4 form, your filing status, how many dependents you claim, and whether you have other income. Your employer uses IRS tables to calculate the amount. Unlike Social Security and Medicare, there is no cap on federal income tax withholding.

Your paycheck stub shows each of these amounts separately so you can see exactly where your money goes.

Why your employer withholds taxes instead of you paying them yourself

The federal government requires employers to withhold payroll taxes and send them directly to the IRS and Social Security Administration. This system spreads tax payments throughout the year instead of asking workers to pay one large bill in April. It also ensures the government receives the money — employers are legally responsible if they fail to withhold and send it.

From the employer's perspective, they are required to match your Social Security and Medicare contributions. If you pay 6.2 percent for Social Security, your employer also pays 6.2 percent on your behalf. This employer match does not come out of your paycheck, but it is a cost to the business. Self-employed people do not have an employer to match their contributions, so they pay both portions themselves through self-employment tax.

The difference between payroll taxes and income taxes

Payroll taxes and income taxes are often confused because they both come out of your paycheck, but they fund different things and work differently. Payroll taxes (Social Security and Medicare) are a fixed percentage of your wages with specific caps or thresholds. Income tax withholding is an estimate of the federal income tax you will owe at the end of the year, based on your W-4 form.

When you file your tax return in April, you are settling your income tax for the year. If your employer withheld too much, you get a refund. If your employer withheld too little, you owe money. Social Security and Medicare taxes do not work this way — the amount withheld is final and does not change when you file your return.

State and local income taxes are separate from federal payroll taxes. Depending on where you live and work, your employer may also withhold state income tax, city income tax, or both. These amounts vary widely by location and are not part of federal payroll taxes.

What happens to payroll taxes after they leave your paycheck

Your employer sends the withheld payroll taxes to the IRS and Social Security Administration on a schedule set by federal law. Large employers typically send these payments weekly or biweekly. The money goes into federal trust funds that pay out Social Security benefits, Medicare claims, and general federal revenue.

Social Security taxes you pay now fund current retirees and disabled workers. When you reach retirement age or become disabled, your benefits will be funded by payroll taxes that workers are paying at that time. Medicare taxes work similarly — they fund the Medicare program for current beneficiaries.

Federal income tax withholding goes into the general Treasury and funds federal government operations. The amount you withheld during the year is credited to your account when you file your tax return.

How to adjust your payroll tax withholding

If you find that you are getting a large refund every year, it means your employer is withholding too much federal income tax. If you owe money in April, your employer is withholding too little. You can adjust this by filling out a new Form W-4 and giving it to your employer's payroll department.

Form W-4 asks for your filing status, number of dependents, other income, and whether you want extra withholding. The IRS provides a worksheet to help you calculate the right amount. You can change your W-4 whenever your situation changes — when you get married, have a child, take a second job, or have a major life change.

You cannot adjust Social Security and Medicare withholding — these amounts are fixed by law and come out of every paycheck. You can only adjust federal income tax withholding through your W-4.

Self-employed people and payroll taxes

If you are self-employed, you do not have an employer to withhold payroll taxes. Instead, you pay self-employment tax, which is 15.3 percent of your net business income — 12.4 percent for Social Security and 2.9 percent for Medicare. This covers both the employee and employer portions because you are both.

Self-employed people pay self-employment tax when they file their annual tax return on Schedule SE. You can also make estimated tax payments quarterly to avoid a large bill in April. Self-employment tax is in addition to federal income tax, which self-employed people also owe.

The Social Security portion of self-employment tax has the same annual cap as regular payroll taxes — in 2024, you pay self-employment tax on up to $168,600 of net income. The Medicare portion has no cap.

Frequently Asked Questions

Can I stop payroll taxes from coming out of my paycheck?

No. Your employer is required by law to withhold Social Security and Medicare taxes from every paycheck. You can adjust federal income tax withholding by submitting a new W-4 form, but you cannot eliminate Social Security and Medicare withholding. These taxes are mandatory.

What if my employer does not withhold payroll taxes?

Your employer is breaking the law. Report this to the IRS using Form 13909 (Complaint About Employer Withholding). You may still owe these taxes yourself when you file your return, so contact a tax professional or the IRS for guidance on your specific situation.

Do I get payroll taxes back when I file my tax return?

Social Security and Medicare taxes are not refundable — once withheld, that money is final. Federal income tax withholding may result in a refund if your employer withheld more than you owe, or you may owe more if your employer withheld less. The refund or amount owed is determined when you file your return.

Why is my payroll tax different from my coworker's if we earn the same amount?

Social Security and Medicare taxes are the same percentage for everyone, so those amounts should match if you earn the same. Federal income tax withholding differs based on your W-4 form — your filing status, dependents, and other income may be different from your coworker's, which changes the withholding amount.

Do payroll taxes explore to tips and bonuses?

Yes. Social Security and Medicare taxes explore to tips you report and bonuses your employer pays. Federal income tax withholding also applies to bonuses. Tips that you do not report are not subject to payroll tax withholding, but you are still legally required to report all tips as income on your tax return.