2025 Payroll Tax Guide: Rates, Facts, and Key Insights You Need to Know

Julia Kagan is a financial and consumer journalist, formerly a senior editor for personal finance at ZAMONA.

What Is Payroll Tax?

Payroll tax is a mandatory deduction from employee earnings, contributed to by both employees and employers, designed to fund essential public programs. This tax applies to wages, tips, and salaries and covers federal, state, and local income taxes as well as Social Security and Medicare contributions.

Employers are responsible for withholding employee portions of payroll taxes from paychecks and submitting them to governmental agencies. Additionally, employers pay their own share of payroll taxes such as Social Security, Medicare, and unemployment insurance taxes, which are not deducted from employees.

Key Highlights

• Payroll taxes are automatically deducted from employees’ paychecks and paid to the government.
• They primarily fund Social Security and Medicare programs.
• Both employers and employees contribute equally to Social Security and Medicare taxes.
• Funds from payroll taxes also support unemployment benefits, local infrastructure, and other government initiatives.

How Payroll Taxes Work

Federal payroll taxes, known as the Federal Insurance Contributions Act (FICA) taxes, include Social Security and Medicare contributions. These appear on pay stubs as FICA or MedFICA. Besides payroll taxes, federal income tax is withheld and directed into the U.S. Treasury’s general fund.

Most U.S. states, some cities, and counties also impose income taxes withheld from paychecks. Employers additionally pay federal unemployment taxes, which employees do not pay.

Payroll tax deductions are itemized on pay stubs, detailing amounts withheld for federal, state, and local income taxes, as well as Social Security and Medicare payments.

The government allocates these funds to critical programs such as Social Security, healthcare, and workers’ compensation. Local governments may impose small payroll taxes to support services like emergency responders, road upkeep, and parks.

2024 Payroll Tax Rates

Payroll taxes for Social Security and Medicare are designed to finance future benefits. Employees contribute 7.65% of their wages (6.2% for Social Security and 1.45% for Medicare), while employers match this amount, totaling 15.3% combined.

Social Security Tax Details

The Social Security tax funds two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund for retirement and survivor benefits, and the Disability Insurance Trust Fund for disability payments. Managed by federal officials, these funds ensure ongoing support.

The tax rate for Social Security is 6.2% for both employee and employer, totaling 12.4%. In 2024, earnings above $168,600 are exempt from Social Security tax.

Enacted in 1935 by President Franklin D. Roosevelt, the Social Security Act provides a safety net for retirees and disabled individuals. The income cap on taxable wages increases yearly to align with wage growth.

Medicare Tax Explained

Payroll taxes also finance Medicare through two trust funds. The Hospital Insurance Trust Fund covers Medicare Part A, which pays for hospital and skilled nursing care, and administrative costs.

Most beneficiaries do not pay premiums for Part A as they contribute through payroll taxes while working. Medicare tax is 1.45% from employees and 1.45% from employers, totaling 2.9%. An additional 0.9% Medicare surtax applies to employees earning over $200,000.

The Supplementary Medical Insurance Trust Fund supports Medicare Parts B and D, covering outpatient services and prescription drugs, funded by congressional allocations, premiums, and investment income.

Unemployment Taxes Overview

Employers fund unemployment insurance to provide benefits to workers laid off from their jobs. Tax rates vary depending on state regulations, industry, and federal requirements. Some states require employee contributions to unemployment and disability insurance.

Self-Employment Tax Responsibilities

Self-employed individuals, including freelancers and small business owners, pay self-employment taxes covering both employee and employer portions of Social Security and Medicare taxes.

For 2024, the self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare, with an extra 0.9% Medicare surtax on income exceeding $200,000.

Pro Tip

Self-employed taxpayers can deduct the employer-equivalent share of FICA taxes as a business expense.

Payroll Taxes vs Income Taxes

Payroll taxes differ from income taxes in purpose and structure. Payroll taxes fund specific programs like Social Security and Medicare, while income taxes contribute to general government funds.

Payroll taxes are flat-rate taxes applied up to a wage cap, whereas income taxes are progressive, increasing with higher earnings.

What Constitutes Payroll Taxes?

Payroll taxes encompass all taxes on wages, salaries, bonuses, commissions, and tips used to fund Social Security, Medicare, unemployment insurance, government programs, and local infrastructure.

Understanding FICA Tax

FICA tax stands for Federal Insurance Contributions Act tax, supporting Social Security and Medicare. The combined tax rate is 15.3%, split evenly between employer and employee (7.65% each), consisting of 6.2% Social Security and 1.45% Medicare taxes.

Is Payroll Tax Mandatory for Everyone?

Generally, all employees pay payroll taxes, automatically deducted from paychecks. Social Security and Medicare taxes are regressive, meaning everyone pays the same for their income level up to a limit. Those without paychecks must make estimated tax payments equivalent to payroll tax amounts.

Final Thoughts

Payroll taxes remain a critical part of the U.S. tax system, ensuring funding for vital programs such as Social Security, Medicare, and unemployment benefits. Both employers and employees share responsibility for these taxes, which also support local government services and infrastructure improvements.

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