Payroll Tax

Taxes withheld from employee wages and paid by employers to fund Social Security and Medicare (FICA taxes) — separate from income tax and calculated as a flat percentage of wages up to certain thresholds.

Payroll taxes are taxes levied on wages and salaries to fund Social Security and Medicare — the two largest federal social insurance programs in the United States. They're collected under the Federal Insurance Contributions Act (FICA) and consist of two parts: Social Security tax (6.2% of wages, paid by both employee and employer, each) and Medicare tax (1.45% of wages, also split equally between employee and employer). As an employee, you see 7.65% total withheld from your paycheck; your employer matches this with another 7.65%, making the total FICA contribution 15.3% of your wages. Self-employed individuals pay both halves — the full 15.3% — as self-employment tax, though they get a deduction for the employer half.

Social Security tax has a wage base limit — in 2024, it applies only to the first $168,600 of wages. Once your earnings exceed this threshold, no additional Social Security tax is withheld (or paid by your employer). Medicare tax has no wage base limit and applies to all wages. High earners also face an Additional Medicare Tax of 0.9% on wages above $200,000 (single) or $250,000 (married filing jointly) — this additional 0.9% is paid entirely by the employee, with no employer match.

Payroll taxes are distinct from federal and state income taxes. Income taxes are progressive and calculated on your adjusted gross income after deductions; payroll taxes are flat percentages of gross wages with no deductions. When you look at a pay stub, you'll typically see separate line items for federal income tax withholding (governed by your W-4), state income tax withholding, Social Security tax, and Medicare tax. These are separate obligations flowing to separate programs — Social Security and Medicare contributions build your future entitlement to those benefits; income tax pays for general government spending.

For employees, payroll taxes are mostly automatic and invisible — they're withheld before you receive your paycheck. Their significance becomes visible in a few specific contexts: when you cross the Social Security wage base mid-year and see your take-home pay increase in the second half of the year; when you become self-employed and suddenly owe the full 15.3% yourself; when you receive a large bonus and realize FICA is withheld on that too (up to the wage base); and when evaluating the total cost of employment — an employer who pays you $100,000 is actually spending approximately $107,650 including their FICA match, not counting benefits.

FICA Components at a Glance (2024)

  • Social Security (employee): 6.2% on wages up to $168,600 — maximum employee contribution $10,453.20/year.
  • Social Security (employer match): 6.2% — employer pays up to $10,453.20 per employee per year.
  • Medicare (employee): 1.45% on all wages — no cap.
  • Medicare (employer match): 1.45% — no cap.
  • Additional Medicare Tax: 0.9% on wages above $200,000 (single) / $250,000 (MFJ) — employee only, no employer match.
  • Self-employment tax: 15.3% on net self-employment income (both employee and employer portions) — deduction allowed for the employer-equivalent half.

The Social Security Wage Base: What Happens When You Hit It

Because Social Security tax only applies to wages up to the $168,600 threshold (in 2024), employees who earn above this amount see their take-home pay increase part way through the year when their cumulative wages cross the threshold. An employee earning $200,000 annually stops having the 6.2% Social Security withholding around late August or September, depending on their pay schedule. This 'paycheck bump' is predictable and plannable — if you know when you'll cross the threshold, you can time large discretionary expenses to coincide with the months of higher net pay. For multiple job holders, each employer withholds Social Security independently without knowledge of other employers' withholding — you may over-withhold and claim a refund at tax time.

Payroll Taxes and Equity Compensation

  • RSU vesting: when RSUs vest, the FMV of vested shares is treated as W-2 wages — subject to income tax withholding and FICA (unless you've already hit the Social Security wage base for the year).
  • NSO exercise: the spread at exercise is ordinary income and subject to FICA in the year of exercise.
  • Bonus payments: bonuses are W-2 wages subject to FICA up to the wage base — a large year-end bonus received before crossing the wage base incurs more FICA than the same bonus received after.
  • ISO exercise: no FICA at exercise (for regular tax purposes), though the spread may be subject to AMT — one of the few tax advantages of ISOs over NSOs.

Example

A software engineer earns a $170,000 base salary. By October, his cumulative W-2 wages have crossed the $168,600 Social Security wage base. His November and December paychecks are approximately $360 larger each month ($168,600 × 6.2% ÷ 12 ≈ $870 per month prior; $0 after the threshold) because Social Security withholding stops. His Medicare withholding (1.45%) continues for the full year, and he owes an additional 0.9% Additional Medicare Tax on wages above $200,000 when he files his return — this last piece is reconciled at tax time, not automatically withheld at the right rate.