Payroll Tax

What is 'Payroll Tax'

Payroll tax is a tax that an employer withholds and pays on behalf of his employees, and it is based on the wage or salary of the employee. In most countries, including the United States, federal authorities as well as many state governments collect some form of payroll tax.

Governments use revenues from payroll taxes to fund programs such as Social Security, health care, unemployment compensation and workers compensation. Sometimes local governments collect a small payroll tax to maintain and improve local infrastructure and programs including first responders, road maintenance, and parks and rec programs.


For more on payroll taxes, read How do I determine what to pay in taxes if my employer doesn't withhold payroll taxes?

Deducted payroll taxes are likely to be itemized on an employee's pay stub. The itemized list typically notes how much was withheld for Medicare and Social Security payments as well as state or municipal payroll taxes.

Federal Payroll Taxes

In the United States, federal payroll taxes cover Social Security and Medicare contributions. As of 2016, employers must take 6.2% of their employees' earnings for payroll taxes. Employers must also match the amount withheld from their employees' checks and submit the total to the Internal Revenue Service (IRS).

For example, if an employer pays his employee $1,000, he needs to withhold $62 for federal payroll taxes. Then he needs to match that amount and send the total of $124 to the IRS.

As of 2015, employers only need to withhold payroll tax on the first $118,500 that their employees earn. However, they must withhold an additional 0.9% on all earnings over the threshold. This is an additional Medicare tax, and employers do not have to match it.

Self-Employment Taxes

Individuals who are self-employed, including contractors and small business owners, do not have employers to remit payroll taxes on their behalf. As a result, they must pay their own payroll taxes. These taxes are called self-employment taxes, but they function like payroll taxes.

As of 2015, self-employed individuals must pay 12.4% of their earnings in Social Security contributions and 2.9% in Medicare payments. The IRS assess these taxes on earnings up to $118,500, and earnings past that threshold face an additional 0.9% Medicare tax.

Payroll Taxes Versus Income Taxes

Payroll taxes are specific taxes used for specific programs, and they are distinct from income taxes, which are put into the government's general fund. While everyone pays a flat payroll tax, income taxes are progressive, and rates vary based on earnings. Employers do not match income taxes, and self-employed individuals do not face higher income taxes than employed workers.