Last updated: March 2026
What Are Payroll Taxes?
Payroll taxes are taxes imposed on both employers and employees based on wages and salaries. They are distinct from income taxes because they fund specific programs: Social Security, Medicare, and unemployment insurance. The combined employee and employer payroll tax burden is substantial, often totaling 15-16% of gross wages before any income tax is considered.
For employees, payroll taxes include the 6.2% Social Security tax (on wages up to $168,600) and 1.45% Medicare tax (on all wages). High earners also pay an additional 0.9% Medicare surtax on wages above $200,000 for single filers. These taxes are mandatory and cannot be reduced through deductions or credits, unlike income tax.
Employee vs. Employer Tax Obligations
The payroll tax system is designed as a shared responsibility between employers and employees. Employees pay federal income tax, state income tax, and their half of FICA (Social Security and Medicare). These amounts are withheld from each paycheck and remitted to the IRS and state tax agency by the employer.
Employers pay a matching FICA contribution (another 6.2% Social Security and 1.45% Medicare), plus unemployment taxes that employees never see. FUTA is a flat 0.6% on the first $7,000 of wages per employee, while SUTA rates vary dramatically by state and employer experience. A company with frequent layoffs will have a higher SUTA rate than one with stable employment, providing a financial incentive for employee retention.
State Payroll Tax Variations
State payroll taxes vary enormously across the country. Nine states charge no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. For employees in these states, only federal taxes and FICA are deducted from their paychecks.
On the employer side, SUTA wage bases range from $7,000 in states like California and Florida to over $60,000 in Washington and Alaska. This means an employer in Washington may pay SUTA on ten times the wages that a California employer does, resulting in dramatically different per-employee costs. Some states also impose additional payroll taxes for disability insurance, paid family leave, or transit programs.
Reducing Your Payroll Tax Burden
While FICA taxes are largely unavoidable, you can reduce your income tax component of payroll deductions through strategic use of pre-tax benefits. Traditional 401(k) contributions, health insurance premiums, HSA contributions, and FSA elections all reduce your taxable income, lowering federal and state income tax withholding.
For employers, managing SUTA costs is a key payroll strategy. Maintaining a low experience rating by minimizing layoffs and contesting fraudulent unemployment claims keeps SUTA rates near the state minimum. Some employers also explore professional employer organizations (PEOs) or employee leasing arrangements that can provide access to lower group rates for workers' compensation and other employer-side costs.
Frequently Asked Questions
What are payroll taxes and who pays them?
Payroll taxes are taxes levied on wages and salaries, split between employees and employers. Employees pay federal income tax, state income tax, and their half of FICA (6.2% Social Security + 1.45% Medicare). Employers match the FICA contribution and additionally pay FUTA (0.6% on the first $7,000) and SUTA (varies by state and employer experience). The combined payroll tax burden is roughly 30-40% of gross wages when both sides are included.
How much is Social Security tax in 2026?
The Social Security tax rate is 6.2% for both employees and employers, for a combined 12.4%. This tax applies only to wages up to the Social Security wage base of $168,600. Once an employee earns more than this amount in a calendar year, Social Security tax stops being withheld from their paycheck, and the employer also stops paying their matching share. Self-employed individuals pay the full 12.4% through self-employment tax.
What is the Additional Medicare Tax?
The Additional Medicare Tax is an extra 0.9% tax on wages exceeding $200,000 for single filers or $250,000 for married filing jointly. This tax is paid only by the employee — the employer does not match it. Combined with the standard 1.45% Medicare tax, high earners pay 2.35% in total Medicare taxes on income above the threshold. There is no wage cap on Medicare taxes, unlike Social Security.
How do pre-tax deductions affect payroll taxes?
Pre-tax deductions like traditional 401(k) contributions and health insurance premiums reduce your federal and state taxable income, lowering the income tax you owe. However, they generally do not reduce FICA taxes — Social Security and Medicare are calculated on gross wages before most deductions. This is an important distinction: a $500/month 401(k) contribution saves you income tax but you still pay the full 7.65% FICA on that amount.
What happens if I work in a different state than I live in?
If you work in a different state than you reside, you may owe income tax to both states. Most states have reciprocal agreements that prevent double taxation — you pay tax only to your home state. Without reciprocity, you typically file a nonresident return in the work state and claim a credit on your home state return. Your employer withholds taxes based on the work state, and you reconcile at tax time. This calculator estimates tax for one state at a time.