Payroll Taxes

Payroll taxes are the second largest source of federal revenue, after the individual income tax. In 2025, payroll taxes brought in $1.75 trillion, or 33 percent of all federal revenue. Many American taxpayers pay much more in federal payroll taxes than they do in income taxes.

The federal government levies five different payroll taxes.

The Social Security payroll tax applies to an individual’s first $184,500 of wages in 2026 (the threshold is inflation-adjusted annually) at a rate of 12.4 percent, split between employees and employers. The same wage threshold applies when calculating Social Security benefits, capping how much high-income retirees receive in line with the cap on the taxes they paid. The Medicare payroll tax applies to all labor earnings at a rate of 2.9 percent. Self-employed workers are subject to the same taxes under the Self-Employed Contributions Act (SECA), although they may deduct the employer-side portion, 7.65 percent, for income tax purposes.

Altogether, the total payroll tax is 15.3 percent of wage and salary income for most earners. In addition, the Affordable Care Act imposed a payroll tax of 0.9 percent on wages and self-employment income of taxpayers earning above $200,000 for single filers and $250,000 for joint filers (the thresholds are not inflation-adjusted). Cumulatively, the Medicare and Social Security payroll taxes are known as FICA, or Federal Insurance Contribution Act, taxes.

Finally, the first $7,000 of an employee’s annual wages or salary, unadjusted for inflation, is subject to the 6 percent Federal Unemployment Tax Act (FUTA) tax, used to fund the federal unemployment insurance program. Employers pay this, and, as such, it does not appear as withheld income on a paystub. Employers may claim a 5.4 percent credit for state unemployment taxes paid, effectively reducing the FUTA rate to 0.6 percent.

Though the payroll tax is split between employees and employers, economic theory suggests that employees ultimately bear the employer-side payroll tax burden through lower wages. Economists consider payroll taxes to be among the least harmful ways of raising revenue. This is because payroll taxes only apply to labor income, rather than to capital income. The supply of labor is less responsive to taxation than the supply of capital, thus taxes on labor are less economically harmful per dollar of revenue raised than taxes on capital.

FICA and other payroll taxes support the Social Security and Medicare trust funds, which face large and growing imbalances projected to lead to insolvency by 2032. The essential problem is that spending is projected to grow faster than revenues due to rising costs and an aging population. This chapter considers options to change payroll tax rates and to expand the payroll tax base.