Glossary

Payroll tax

A tax on wages that funds Social Security and Medicare, split between employers and employees.

Also called: FICA, Social Security tax, Medicare tax

Payroll taxes are taxes on wages and salaries, collected by employers and sent to the government. In the United States, they are mainly the Federal Insurance Contributions Act (FICA) taxes: 12.4 percent for Social Security, split equally between employer and employee, on wages up to an annual cap, and 2.9 percent for Medicare, similarly split, with no cap and an additional 0.9 percent for high earners. Self-employed people pay both halves. Unemployment insurance is funded by separate payroll taxes.

The revenue is dedicated to specific programs and flows into trust funds, which pay benefits. This earmarking has helped build political support for Social Security, since workers see their contributions as earned. Because of the wage cap, the Social Security tax is regressive at higher incomes.

Economists generally agree that the employer's share is borne mostly by workers through lower wages. Proposals to address Social Security's long-term funding gap include raising or removing the cap, raising the rate, or changing benefits. Conservatives tend to favor benefit changes or personal accounts, and Democrats favor higher taxes on earnings above the cap. Payroll taxes are the second-largest source of federal revenue after individual income taxes. See also entitlement.

Last reviewed November 8, 2026

In the index now

Related terms

Social Security trust fund The accounts, holding special Treasury securities, that receive Social Security payroll taxes and pay benefits. Regressive tax A tax that takes a larger share of income from low earners than from high earners. Entitlement A government benefit to which people are legally entitled if they meet eligibility rules, such as Social Security and Medicare. Mandatory spending Federal spending set by permanent law rather than annual appropriations, including Social Security, Medicare and Medicaid. Marginal tax rate The tax rate that applies to the next dollar of income, as distinct from the average rate on all income.