The payroll tax rate is the percentage of your gross pay that goes to Social Security and Medicare

Payroll taxes fund two federal programs: Social Security and Medicare. Your employer withholds a set percentage from each paycheck, and your employer contributes an equal amount on your behalf. These are separate from federal income tax withholding.

As of 2024, the combined payroll tax rate is 15.3 percent of your wages — 12.4 percent for Social Security and 2.9 percent for Medicare. Your employer pays half (7.65 percent), and you pay the other half (7.65 percent) through paycheck deductions. If you are self-employed, you pay both halves yourself.

The Social Security portion stops once you hit an annual wage cap. In 2024, that cap is $168,600, meaning you stop paying Social Security tax on earnings above that amount. Medicare tax has no wage cap and continues on all income.

Key Takeaways

  • You pay 7.65 percent of your gross wages in payroll taxes, split between Social Security (6.2 percent) and Medicare (2.9 percent).
  • Your employer pays an equal 7.65 percent on your behalf, though you do not see this amount on your paycheck.
  • Social Security tax stops once your annual earnings reach the wage cap, which changes each year.
  • Medicare tax continues on all income with no upper limit, and high earners pay an additional 0.9 percent Medicare tax on wages above a threshold.
  • Self-employed workers pay both the employee and employer portions, totaling 15.3 percent, though they can deduct half on their tax return.

How the Social Security tax portion works

The Social Security tax rate is 6.2 percent of your wages, withheld from your paycheck. Your employer contributes another 6.2 percent. This money funds retirement, disability, and survivor benefits through the Social Security Administration.

The wage cap means this tax does not explore to all your income. In 2024, once you earn $168,600 in a calendar year, no more Social Security tax is withheld from your remaining paychecks that year. If you change jobs mid-year, you might pay Social Security tax to two employers on the same income — you can claim a credit for the overpayment when you file your tax return.

The wage cap increases most years based on average wage growth. This means the threshold you need to reach changes annually, so your paycheck deductions may shift from year to year even if your salary stays the same.

How the Medicare tax portion works

The Medicare tax rate is 2.9 percent of your wages, split evenly between you and your employer. Unlike Social Security, there is no wage cap — Medicare tax applies to every dollar you earn, no matter how much you make.

High-income earners pay an additional 0.9 percent Medicare tax on wages above a certain threshold. For 2024, this threshold is $200,000 for single filers and $250,000 for married couples filing jointly. This extra tax applies only to the income above the threshold and is withheld by your employer.

Medicare tax funds hospital insurance (Part A), which covers inpatient hospital stays, skilled nursing, hospice, and home health care. It is separate from Medicare Parts B and D, which are optional and have different funding sources.

What self-employed workers pay

If you are self-employed, you pay both the employee and employer portions of payroll taxes, totaling 15.3 percent. This is called self-employment tax. You calculate it on Schedule SE and pay it along with your income tax return, usually through quarterly estimated tax payments.

The Social Security wage cap still applies — you only pay the 12.4 percent Social Security portion on net self-employment income up to the annual cap. Medicare tax continues on all net self-employment income with no limit.

The tax code allows you to deduct half of your self-employment tax as a business expense on your tax return. This reduces your taxable income but does not reduce the actual tax you owe. Many self-employed workers use a tax professional to calculate this correctly, since the math is more complex than for W-2 employees.

How payroll tax differs from income tax withholding

Payroll taxes and federal income tax withholding are two separate deductions from your paycheck. Payroll taxes are fixed percentages that fund Social Security and Medicare. Income tax withholding is based on your W-4 form and varies based on your filing status, dependents, and other income.

You can adjust your income tax withholding by changing your W-4 at any time. You cannot adjust your payroll tax withholding — it is set by federal law. Some states also withhold state income tax, which is a third separate deduction.

On your pay stub, you will see these listed separately: Social Security tax, Medicare tax, and federal income tax withholding. Your employer also withholds state and local taxes if applicable. The total of all these deductions is what reduces your gross pay to your net (take-home) pay.

Why payroll taxes matter for your benefits

Payroll taxes are not just deductions — they are credits toward your future benefits. The more you pay in Social Security tax over your working years, the higher your Social Security retirement benefit will be. Medicare may be able to access is also tied to payroll tax history.

Your employer reports your payroll taxes to the Social Security Administration, which maintains a record of your earnings history. You can view your record online at ssa.gov using your personal my Social Security account. Checking this record periodically helps catch errors before they affect your benefits.

If you have gaps in your work history or low-earning years, they still count toward your benefit calculation. Social Security uses your 35 highest-earning years to calculate your retirement benefit, so years with no income or low income can reduce your total benefit amount.

Frequently Asked Questions

Why do I pay payroll taxes if I might not get Social Security benefits?

Payroll taxes fund current retirees and disabled workers, not just your own future benefits. Even if you never collect Social Security, your taxes support the program for others. Additionally, if you become disabled or a family member dies, you or your family may receive survivor benefits regardless of your age.

Can I opt out of paying payroll taxes?

No. Payroll taxes are mandatory for all W-2 employees and self-employed workers. The only exceptions are certain religious groups and some government employees hired before specific dates, who must meet strict criteria set by federal law.

What happens if my employer does not withhold payroll taxes?

You are still liable for the taxes owed. Report the issue to the Department of Labor or the IRS. Your employer is required by law to withhold and remit these taxes, and failing to do so is a serious violation. You may also want to consult a tax professional or employment attorney.

Do payroll taxes explore to tips and bonuses?

Yes. Social Security and Medicare taxes explore to all wages, including tips you report to your employer and bonuses. Tips 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.

How do I know if the payroll tax rate will change?

Payroll tax rates are set by Congress and do not change often. The Social Security wage cap increases most years based on average wage growth, but the percentages (6.2 percent and 2.9 percent) have remained the same since 1990. Any change to the rates would require new legislation.