Jul 07, 2021A Guide to Payroll Taxes in Plain English

Payroll taxes can seem rather self-explanatory since they are simply taxes being withheld from an employee’s paycheck. However, most employees are less familiar with the type of taxes they are paying, why they are paying them, and exactly how much money is being withheld. Employers, too, should be aware of their responsibilities regarding payroll taxes. This article explains payroll taxes and details the pay rate for each type of tax, the individuals responsible for paying, and how the tax is paid.


Overview of Payroll Taxes

Payroll and income taxes may seem interchangeable, but there is a slight distinction between these two types of tax. While both are withheld at specific rates from an employee’s wages, tips, and salaries, payroll taxes are used by the federal government to fund special government programs. Income tax on the other hand goes directly to the U.S. Treasury. In addition to these federal taxes, local governments can collect a small amount of payroll taxes to help fund their own special programs and projects.


Payroll Tax Rates

The two main types of federal payroll taxes are the Social Security and Medicare taxes, which show up as FICA (Federal Insurance Contributions Act) and MedFICA (Medicare Federal Insurance Contributions Act) on an employee’s paystub. Employees and employers share the responsibility for paying these taxes at the following rates:


  Social Security Medicare Total
Employer Pays 6.2% 1.45% 7.65%
Employee Pays 6.2% 1.45% 7.65%


(These rates were updated by the Internal Revenue Service [IRS] in March of 2021. For more information, see “Topic No. 751 Social Security and Medicare Withholding Rates.”)


According to these rates, 7.65% of an employee’s paycheck will be withheld from their take-home earnings. If an employee makes $400.00 per paycheck, they can expect to have 7.65% of that paycheck, or $30.60, withheld from their earnings and paid to the IRS.


There is a maximum salary limit applied to the Social Security tax. For the 2021 tax year, this means that employees will only pay the 6.2% Social Security tax on an annual salary of up to $142,800. If an employee makes more than that taxable maximum, they will still only pay 6.2% of $142,800—or $8,853.60—and their employer would pay the same amount (see “Contribution and Benefit Base”).


Medicare works a bit differently because it has no salary limit. Rather, if someone has an annual salary greater than $200,000, or $250,000 for couples filing jointly, these individuals can expect to pay an additional 0.9% for Medicare. In these instances, they would be paying 2.35% of their income specifically towards Medicare.


Who Pays the Payroll Taxes?

While half of the payroll taxes come out of an employee’s paycheck, employers are responsible for paying the other half of the taxes, as well as ensuring that these taxes are correctly filed and paid to the IRS on their employees’ behalf. Employers also pay federal unemployment taxes for their employees, but the rate for unemployment taxes varies depending on the industry and state.


If someone is self-employed, they are responsible for paying payroll taxes without the assistance of an employer. Those who are self-employed are taxed at a rate of 15.3%, which includes a 12.4% payment to Social Security and a 2.9% payment to Medicare. Self-employment incomes that exceed $200,000 are taxed the additional 0.9% for Medicare as well (see “Self-Employment Tax (Social Security and Medicare)”).


How Are Payroll Taxes Paid?

Employers will use Form 941 to pay their employees’ payroll taxes every quarter. Employers use this form to report the income tax, Social Security tax, and Medicare tax withheld from their employees’ paychecks. Employers will also pay their portion of Social Security and Medicare tax on this form (see “Instructions for Form 941”).