Financial Word of the Day: Payroll Tax
You earn $1,000, but somehow $1,000 never makes it into your bank account. Where did the rest go?
Some of it probably went toward payroll taxes.
What Is a Payroll Tax?
A payroll tax is a tax connected to the wages an employee earns. These taxes are generally withheld from an employee’s paycheck, and employers are also responsible for paying certain payroll taxes themselves.
The two payroll taxes most employees will recognize are Social Security and Medicare taxes, collectively known as FICA taxes.
For 2026, employees generally pay:
6.2% for Social Security
1.45% for Medicare
That means most employees pay 7.65% of their wages in FICA payroll taxes, and their employer generally contributes another 7.65%.
Social Security tax applies only to wages up to the annual Social Security wage base, which is $184,500 for 2026. Medicare tax does not have the same wage limit. Higher-income employees can also be subject to an additional 0.9% Medicare tax.
What Do These Payroll Taxes Look Like?
Suppose you earn $60,000 per year.
Your basic employee FICA taxes would be approximately:
Social Security: $60,000 × 6.2% = $3,720
Medicare: $60,000 × 1.45% = $870
Total: $4,590
And your employer generally pays another $4,590 on your behalf.
That is an important financial concept to understand: your salary is not the same thing as what your employer spends to employ you.
A $60,000 employee actually costs an employer considerably more than $60,000 once payroll taxes, insurance, retirement benefits, workers' compensation, and other benefits are included.
Payroll Tax vs. Income Tax
These two are easy to confuse.
Income tax is based primarily on your taxable income and tax situation.
Payroll taxes fund specific government programs such as Social Security and Medicare and are generally calculated as a percentage of your wages.
Your paycheck may have both taken out, which explains why your gross pay and your take-home pay can look very different.
Why Should You Care About Payroll Taxes?
Understanding payroll taxes helps you better evaluate job offers, calculate your actual take-home pay, budget realistically, and understand the true cost of hiring employees if you own a business.
It is especially important when moving from being an employee to becoming self-employed.
Why?
When you're an employee, your employer pays half of the basic Social Security and Medicare taxes. When you're self-employed, you generally become responsible for both sides through the self-employment tax.
That can be an unpleasant surprise if you aren't planning for it.
Using "Payroll Tax" in Conversation
You might say: “My salary is $75,000, but I know my take-home pay will be lower after income taxes, payroll taxes, insurance, and retirement contributions.”
That simple statement shows you understand an important principle: What you earn and what you keep are two different numbers.
The better you understand the difference, the better you can plan your spending, saving, investing, and future wealth.
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