Payroll Tax 101
Federal tax gets all the attention, but payroll tax can take a serious toll on your take-home pay as well. This is tax that you pay in ADDITION to your Federal income tax.
Take a close look at your paystub from your company. You will probably notice that your employer withholds multiple types of tax in addition to federal (and perhaps state and city) income tax. There are two additional items deducted from your pay. Terms vary, so they may be labeled OASDI (for Old Age, Survivors, and Disability Insurance Program which is the official name for Social Security) and MEDI, or simply Social Security and Medicare.
Together, Social Security and Medicare tax make up the payroll tax, also sometimes called FICA tax (for Federal Insurance Contributions Act). The payroll tax rate for most taxpayers is 15.3%, and it is split equally between the employer and employee.
Although often spoken of as a pair, these two two payroll tax components have separate structures:
Social Security Tax: You and your employer each pay a flat 6.2% for Social Security, up to a wage base set annually by the Social Security Administration. If you earn more than the wage base, the withholding stops once you've hit the cap. So, for example, if your income is double the wage base, you'll have the 6.2% withheld for the first six months of the year, and you should see a bump in your take-home pay starting in July. As noted in a prior blog post, the cap on the amount of tax you pay makes Social Security a regressive tax structure.
Medicare Tax: Medicare tax makes up the rest of your Payroll tax, with you and your employer each paying a flat 1.45%. Unlike Social Security tax, there is no cap on Medicare tax. In fact, the 2010 Affordable Care Act introduced an additional 0.9% Medicare surtax for high earners. The surtax only screws over the employees and not the employer, because this additional tax is only paid by the employee; your employer does not pay the additional amount.
2021 Payroll Tax Summary
Social Security Tax Rate
12.4% (Shared equally between employee and employer; 6.2% each)
Maximum Income Subject to Social Security Tax: $142,800
Medicare Tax Rate
2.9% (Shared equally between employee and employer; 1.45% each)
Surtax applies to income above:
Single: $200,000
Married Filing Jointly: $250,000
Using the 2021 tax chart above, consider a single filer whose salary income is $250,000. In addition to Federal income tax, they would owe $24,682.20 in payroll tax broken down as follows:
Social Security: 12.4% on the first $142,800, or $17,707.20 split equally between employee and employer.
Medicare: 2.9% Medicare tax on the first $200,000, or $5,800 split equally between employee and employer, plus the employee owes an additional 0.9% (for a total of 2.35%) on the next $50,000, or $1,175.
Employee owes a total of $12,928.60, the employer owes $11,753.60 on your behalf. If you’ve never noticed this tax, it is because employers are required to make the calculation for you and withhold the exact amount from your paycheck.
If you’re thinking you are only really paying about half of this tax…
Most employers take the payroll tax they are paying on your behalf into consideration when looking at your full compensation, afterall, it is for your benefit. So in the end, it’s really YOU paying the whole payroll tax.
Next time you’re trying to estimate your after-tax take-home pay, don’t forget to add in the payroll tax! If you’re looking for ways to avoid paying the payroll tax, consider my blog post here.
