Explore All Topics

What is payroll tax?

3 min read

3 min read

Getting your first paycheck can be an exciting time. You may have calculated what you expect to earn each pay period and are looking to plug numbers into your budget.

But when you learn that a chunk of your paycheck went to payroll tax, you’re probably wondering: “What is payroll tax?” This article will discuss IRS payroll tax, including who pays, how payments are made, and how much to pay.

payroll tax

What is payroll tax?

Payroll tax is withheld from employees’ wages by their employer. Payroll tax includes three main components:

  • Federal income tax withholding
  • The employee’s portion of Medicare tax
  • The employee’s portion of Social Security tax

How does payroll tax work?

Payroll tax is taken out of an employee’s earnings. Employers then send the withheld taxes along with their portion of Social Security and Medicare taxes when they deposit taxes.

As an individual tax filer, you don’t have to manually pay in payroll tax from each paycheck. Your employer will do this for you.

How much is payroll tax?

Federal income tax withholding can be 0% or higher depending on your W-4 withholdings. (You can use our W-4 calculator to determine withholding amounts.)

Social Security and Medicare is 7.65% for the employee portion withheld from their gross pay and the employer also pays 7.65% for their portion when they deposit the employee’s portion (6.2% is Social Security and 1.45% is Medicare.)

The total Social Security tax rate is 12.4%. If you are an employee, you are only responsible for paying 6.2% of your paycheck and your employer pays the other half. If you are self-employed, you are responsible for the full amount.

What are wage limits for payroll tax?

For earnings in 2022, this wage base limit is $147,000. So, if you earn that amount with one employer, your payroll taxes cap at that amount. If you have more than one employer and you earn more than that amount, you’ll claim an adjustment of any overpaid Social Security taxes on your return.

There is no wage-based limit for Medicare tax. All covered wages are subject to Medicare tax. But, if you receive wages over $200,000 a year ($250,000 for married filing jointly, $125,000 for married filing separately), your employer must withhold a .9% additional Medicare tax. This will apply to the wages over the threshold. This is on top of the 1.45% employer tax rate.

Need more tax help with IRS payroll tax?

Whether you need help figuring out your withholding for IRS payroll tax, or you are looking for tax guidance as a small business, we can help! With multiple ways to file your taxes, we make sure your tax outcome is optimized, earning you every tax credit and deduction you are entitled to.

Was this topic helpful?