# Understanding Payroll Tax: FICA, Medicare, and Unemployment Explained

![Payroll Tax: Taxes paid on employee earnings to fund social insurance programs.](https://www.investopedia.com/thmb/nrEZ1ucm0vI2KQSqOXtBPxl5kGo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/payrolltax.asp_final-f09aa1c3011c44ba925ae501bd4785ad.jpg)

*— Investopedia / Ryan Oakley*

## What Is a Payroll Tax?

Payroll taxes play a crucial role in funding essential government programs, such as Social Security and Medicare. Both employees and employers contribute to these taxes, which are automatically deducted from wages. While employees see these deductions on their pay stubs, employers handle additional taxes like unemployment insurance.

Understanding how payroll taxes function helps individuals comprehend their contributions to society's safety net and infrastructure, ensuring financial security in retirement or during health-related circumstances. This article explores the components and significance of payroll taxes, providing insights into their impact on employees, employers, and the self-employed.

### Key Takeaways

*   Payroll taxes fund essential government programs like Social Security and Medicare, with both employees and employers sharing the tax burden, each contributing 7.65% of wages.
*   The Federal Insurance Contributions Act (FICA) tax includes a 6.2% Social Security tax and a 1.45% Medicare tax, shown as deductions on employees' pay stubs.
*   Self-employed individuals pay both the employer and employee portions of payroll taxes, totaling a self-employment tax rate of 15.3%, which includes additional Medicare taxes on income exceeding $200,000.
*   Employers are responsible for federal and state unemployment taxes, with rates differing by industry and state, and providing benefits to employees who are laid off.
*   While payroll taxes are flat and capped annually, income taxes are progressive and support broader governmental funding at the federal and state levels.

## Comprehensive Guide to Payroll Taxes

Federal payroll taxes include [Social Security](https://www.investopedia.com/terms/s/social-security-tax.asp) and Medicare contributions, which constitute the [Federal Insurance Contributions Act](https://www.investopedia.com/terms/f/fica.asp) (FICA) tax in the United States. These are labeled as MedFICA and FICA on pay stubs. Federal income tax, which is also withheld from employee paychecks, goes into the general fund of the U.S. Treasury.

Most states, as well as [some cities and counties](https://www.investopedia.com/terms/l/localtax.asp), impose income taxes, which are also withheld as payroll taxes. In addition, employers, but not employees, also pay federal unemployment taxes for each of their employees.

Payroll taxes are collected by federal authorities and some state governments in many countries, including the U.S. These payroll tax deductions are itemized on an employee's pay stub. The itemized list notes how much is withheld for federal, state, and municipal income taxes, as well as the amounts collected for Medicare and Social Security payments.

Governments use revenues from payroll taxes to fund specific programs, including Social Security, healthcare, and workers' compensation. Local governments may collect a small payroll tax to maintain and improve local infrastructure and services, including first responders, road maintenance, and parks.

## Calculating Payroll Tax Contributions

Social Security and Medicare are funded by contributions during your working years, allowing you to withdraw funds in retirement or under certain medical conditions. Both employees and employers pay 7.65% for Social Security and Medicare, totaling 15.3%.

### Breakdown of Social Security Payroll Taxes

Funds paid to Social Security taxes go into two trust funds: the [Old-Age and Survivors Insurance (OASI) Trust Fund](https://www.investopedia.com/terms/o/old-age-and-survivors-insurance-trust-fund.asp), which pays retirement and survivor benefits; and the Disability Insurance Trust Fund, for disability benefits. These trust funds are managed by the [Secretary of the Treasury](https://www.investopedia.com/terms/t/treasury-secretary.asp), the [Secretary of Labor,](https://www.investopedia.com/articles/insights/012117/what-does-us-secretary-labor-do.asp) the Secretary of Health and Human Services, the Commissioner of Social Security, and two public trustees.

The Social Security tax is 6.2%, paid by both the employee and the employer, for a total of 12.4%. In 2024, income above $168,600 in 2024 is not taxed for Social Security.

President Franklin D. Roosevelt signed the [Social Security Act](https://www.investopedia.com/terms/s/social-security-act.asp) into law on Aug. 14, 1935, to provide a safety net for the disabled and retirees. When the program was conceived, high-wage earners were exempt from paying into the fund and receiving Social Security benefits; however, the U.S. Congress replaced the exemption with a cap that usually increases at the same rate as wages.

### Understanding Medicare Tax Contributions

As noted above, payroll taxes also [go toward Medicare](https://www.investopedia.com/medicare-tax-definition-5115380). These payroll deductions go into one of two separate trust funds: the Hospital Insurance Trust Fund. The Hospital Insurance Trust Fund pays for [Medicare Part A](https://www.investopedia.com/terms/m/medicare-part-hospital-insurance.asp) and the associated administration fees. Part A covers hospital care, skilled nursing care, and sometimes home care.

Most people don't pay a premium for Part A (hospital insurance) since they likely paid into the program during their working years through the payroll tax. The tax for Medicare is 1.45% for the employer and 1.45% for the employee, for a total Medicare tax of 2.9%. For individuals that earn over $200,000, an additional 0.9% is charged. This extra tax applies only to employees, not employers.

The Supplementary Medical Insurance Trust Fund helps pay for Medicare Parts B and D, as well as other administrative costs. Part B covers laboratory tests and screenings, outpatient care, x-rays, ambulance service, and many additional costs. Part D helps with prescription drugs. This trust fund is funded through the authorization of congress that allocates funds, the premiums from people who are enrolled in Part B and D, and other sources, such as interest earned on the fund's investments.  

## Employer Obligations for Unemployment Taxes

Employers bear the primary responsibility for funding unemployment insurance. If they lay off employees, those employees are entitled to unemployment benefits. Unemployment insurance rates vary by industry, state, and federal requirements. Some states also require employees to contribute to unemployment and disability insurance.  

## Navigating Self-Employment Taxes

[Self-employed](https://www.investopedia.com/terms/s/self-employed-person.asp) individuals, including contractors, freelance writers, musicians, and small business owners, must remit payroll taxes as well. These are sometimes referred to as [self-employment taxes](https://www.investopedia.com/terms/s/selfemploymenttax.asp).

Self-employed individuals are responsible for paying their own payroll taxes, as they do not have [an employer to do so](https://www.investopedia.com/fa-one-thing-gig-worker-tax-liability-8621932) on their behalf. As a result, they must cover both the employer and employee portions of the tax.

The 2024 self-employment tax rate is 15.3%, covering 12.4% for Social Security. The other portion of the tax is a 2.9% payment to Medicare, with another 0.9% surtax for Medicare on earnings that exceed $200,000.

> **Tip**
>
> If you are self-employed, you can deduct the employer portion of FICA taxes as a business expense.

## Payroll Taxes vs. Income Taxes

There is a distinction between a payroll tax and an [income tax](https://www.investopedia.com/terms/i/incometax.asp), although both are deducted from paychecks. Payroll taxes are used to fund specific programs. Income taxes go into the general funds at the U.S. Treasury. State income tax, if the state levies any, goes into the state's treasury.

Everyone pays a flat payroll tax rate up to a yearly cap. Income taxes, however, are progressive. Rates vary based on an individual's earnings.

## What Makes Up Payroll Taxes?

Payroll taxes include all of the taxes on an individual's salary, wage, bonus, commission, and tips. These taxes are used to pay for Social Security, Medicare, unemployment, government programs, and local infrastructure.

## What Is the FICA Tax?

The FICA tax stands for Federal Insurance Contributions Act and is used to pay for Social Security and Medicare. The total tax is 15.3%, split evenly between an employer and an employee, meaning each pays a tax of 7.65%. This is made up of the Social Security tax (6.2%) and the Medicare tax (1.45%).

## Does Everyone Pay a Payroll Tax?

Yes, for the most part, everyone pays a payroll tax, which is automatically deducted from one's paycheck. The Social Security and Medicare taxes are regressive (everyone pays the same amount), while income tax is progressive (those who make more are taxed at a higher rate). If you don't receive a paycheck, you must pay estimated taxes equivalent to what would have been withheld from your income.

## The Bottom Line

Payroll taxes are the taxes employees and employers pay on wages, tips, and salaries. These taxes include federal, state, and local taxes, as well as FICA taxes, which are taxes for Social Security and Medicare. These taxes are all taken out of an employee's wages.

These taxes fund a range of programs, including Social Security, healthcare, defense spending, government salaries, and workers' compensation. Local governments may collect a small payroll tax to maintain and improve local infrastructure and services, including first responders, road maintenance, and parks.  

> **Article Sources**
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