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- A payroll tax is levied on your paycheck to help fund federal insurance programs.
- FICA, for Social Security and Medicare, and FUTA, for unemployment, make up the tax.
- The state you work in may charge a separate payroll tax on your earnings.
- This article was reviewed for accuracy and clarity by Lisa Niser, a member of Personal Finance Insider's tax review board.
- See Personal Finance Insider's picks for the best tax software »
What is payroll tax?
When you earn a paycheck in the United States, that income is subject to payroll tax. The federal payroll tax includes Social Security and Medicare taxes, known as FICA. The revenue from these taxes funds social insurance programs. You may also incur payroll taxes from your state.
The total payroll tax employees are responsible for is equal to 7.65% of their earnings — a 6.2% Social Security tax and a 1.45% Medicare tax. Income over $142,800 in 2021 isn't subject to the Social Security tax. This limit is adjusted annually.
If you make over $200,000 a year, or $250,000 if you file taxes jointly, you're also subject to a 0.9% Medicare surtax.
These taxes are withheld from your paycheck by your employer, who is also responsible for paying an identical 7.65% tax on your earnings. And they pay FUTA, a separate tax that funds unemployment programs, on your behalf.
If you're self-employed, you have to cover both parts of the FICA tax for a total of 15.3% of your earnings, which is known as the self-employment tax.
What is the difference between payroll tax and income tax?
Payroll tax and income tax may show up next to each other on your pay stub, but these two taxes have different purposes. Payroll taxes are dedicated to Social Security and Medicare programs, while income tax pays for a big chunk of the federal government's annual budget.
Income taxes are charged based on how much you earn every year. For 2021, marginal tax rates range from 10% to 37%. With income taxes, you'll pay more as you earn more. Payroll tax is more like a flat tax or a regressive tax, as everyone pays the same rate up to the annual income limit and a lower effective rate on higher incomes.
Where can I find my payroll tax?
If you want to see exactly how much you contribute for payroll taxes, look at your pay stub for the current period and year-to-date totals. When you complete your tax return, you will also see your payroll taxes, income taxes, and other withholdings on your W-2 form.
As you can see in the sample pay stub below, there are five different deductions. The second tax, FICA, signifies Social Security taxes, and the Medicare tax is below that.
Your state could have additional taxes or withholdings, as shown here for California.
While your employer, tax software, or accountant may take care of most of the math for you, understanding your taxes is important for taking charge of your personal finances.
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