Payroll Tax Basics: What Every Worker and Employer Should Know

Updated March 2026 · By the PayrollCalcs Team

Payroll taxes fund some of the most critical programs in the United States, including Social Security, Medicare, and unemployment insurance. Whether you are an employee watching deductions shrink your paycheck or an employer calculating the true cost of your workforce, understanding payroll taxes is essential for accurate financial planning. These taxes are shared between workers and employers, but the total burden often comes as a surprise to those who have never examined the full picture.

The Components of Payroll Tax

Payroll taxes consist of several distinct levies, each funding a different program. The two largest are Social Security tax and Medicare tax, collectively known as FICA. Federal income tax withholding, while technically not a payroll tax, is administered through the payroll system. Employers also pay Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA).

Each tax has its own rate, wage base, and rules. Some are split equally between employer and employee, some are paid only by the employer, and some apply only up to a certain income threshold. Together, they represent a significant portion of both worker earnings and employer costs.

Social Security tax: 6.2 percent each for employer and employee
Medicare tax: 1.45 percent each for employer and employee
Additional Medicare tax: 0.9 percent on employee earnings over $200,000
FUTA: 6 percent on first $7,000 per employee, reduced to 0.6 percent with state credit
SUTA: rates vary by state and employer experience rating

Pro tip: Employer payroll tax costs typically add 8 to 12 percent on top of an employee salary, which is why the total cost of employment always exceeds the listed salary.

Social Security and Medicare Tax (FICA)

FICA taxes are the backbone of payroll taxation. Social Security tax applies at 6.2 percent for both employee and employer on earnings up to the annual wage base, which adjusts for inflation each year. For 2024, the wage base is $168,600, meaning the maximum Social Security tax per person is $10,453.20.

Medicare tax has no wage base limit, so all earned income is subject to the 1.45 percent rate from both parties. Workers earning over $200,000 individually or $250,000 filing jointly pay an additional 0.9 percent Medicare surtax that has no employer match.

Combined FICA rate: 15.3 percent split evenly between employer and employee
Social Security wage base adjusts annually for inflation
Self-employed individuals pay the full 15.3 percent
The self-employed can deduct half of their FICA tax as a business expense

Pro tip: Track your year-to-date Social Security wages on your pay stub. Once you hit the wage base, your take-home pay increases for the remaining pay periods.

Federal and State Income Tax Withholding

Federal income tax withholding is calculated based on your W-4 form elections and the IRS withholding tables. Unlike FICA, which applies at a flat rate, income tax uses a progressive bracket system where higher portions of income are taxed at increasing rates.

State income tax varies dramatically across the country. Some states have flat rates, others use progressive brackets, and nine states impose no income tax at all. Employers must withhold the correct state tax based on where work is performed, which can create complexity for remote workers living in a different state than their employer.

Federal brackets range from 10 percent to 37 percent in 2024
States with no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
Remote workers may owe taxes in both their state of residence and employer state
W-4 adjustments directly impact how much is withheld each pay period

Pro tip: If you consistently receive large tax refunds, consider adjusting your W-4 to reduce withholding. A large refund means you gave the government an interest-free loan all year.

Unemployment Taxes: FUTA and SUTA

Federal Unemployment Tax (FUTA) is paid entirely by employers at a rate of 6 percent on the first $7,000 of each employee wages. However, employers who pay state unemployment taxes on time receive a 5.4 percent credit, reducing the effective FUTA rate to just 0.6 percent.

State Unemployment Tax (SUTA) rates and wage bases vary significantly by state. New employers typically pay a standard rate, which then adjusts based on their claims experience. Employers with frequent layoffs pay higher rates, creating a financial incentive to maintain stable employment.

FUTA effective rate: 0.6 percent on first $7,000 per employee
Maximum FUTA tax per employee: $42 per year
SUTA rates range from under 1 percent to over 10 percent depending on state and experience
SUTA wage bases range from $7,000 to over $50,000 by state

Pro tip: Employers can reduce SUTA rates over time by minimizing layoffs and contesting fraudulent unemployment claims promptly.

The Total Payroll Tax Burden

When you combine all payroll taxes, the total burden is substantial. For a worker earning $70,000, the employee pays roughly $5,355 in FICA taxes plus federal and state income tax. The employer pays an additional $5,355 in matching FICA, plus FUTA and SUTA, adding approximately $6,000 to $8,000 to the total cost of employment.

For self-employed individuals, the picture is even more striking. They pay both halves of FICA, totaling 15.3 percent on net self-employment income, plus income tax. While they can deduct half of self-employment tax, the overall tax rate for self-employed individuals often exceeds 30 percent before state taxes.

Employee FICA: 7.65 percent of wages up to the Social Security wage base
Employer cost: FICA match plus FUTA, SUTA, and workers compensation
Self-employed total FICA: 15.3 percent with a deduction for half
Total employer burden typically adds 10 to 15 percent beyond salary

Pro tip: When budgeting for a new hire, always calculate the fully loaded cost including all employer-side payroll taxes and required insurance premiums.

Frequently Asked Questions

What is the difference between payroll tax and income tax?

Payroll taxes are flat-rate taxes on wages that fund specific programs like Social Security and Medicare. Income tax uses progressive brackets and funds general government operations. Both are withheld from paychecks but serve different purposes.

Do employers pay payroll taxes?

Yes. Employers pay a matching 7.65 percent FICA tax on all employee wages, plus FUTA and SUTA unemployment taxes. The employer payroll tax burden is typically 8 to 12 percent of each employee gross wages.

Why is self-employment tax so high?

Self-employed individuals pay both the employer and employee portions of FICA, totaling 15.3 percent. W-2 employees pay only 7.65 percent because their employer covers the other half.

Is there a cap on payroll taxes?

Social Security tax has a wage base cap that adjusts annually. Medicare tax has no cap. Federal income tax withholding is based on brackets with no hard cap. FUTA applies only to the first $7,000 per employee.

How do payroll taxes work for remote employees in different states?

Employers must generally withhold state income tax based on where the employee works, not where the company is located. Some states have reciprocity agreements that simplify multi-state tax situations.