Who Pays the Payroll Tax?

Roni Tambasco

November 24, 2022

Payroll Tax

Depending on who you talk to, the payroll tax is paid by either the employer or the employee. However, there are many misconceptions out there regarding payroll tax. Here are a few facts you should know about this tax.

Social Security

Almost all Americans must pay Social Security payroll taxes on the income they earn from their jobs. Workers are responsible for half of the Social Security tax through payroll withholding, and employers are responsible for the other half.

Payroll taxes fund many Social Security programs, including retirement, disability, and survivor benefits. The tax also helps finance the federal healthcare program for older people.

The tax rate is based on the total income earned and applies to wages up to a specific limit. The limit is also known as the taxable maximum. It has increased gradually since the tax rate was introduced in 1990. The maximum in 2021 is $142,800. This is $5,100 more than the rate in 2020.

In addition to the payroll tax, workers pay Social Security and Medicare taxes, which are set aside for Medicare. Employers also must report the employee share of Medicare tax on a W-2 form.


Regardless of your age or job type, you will have to pay the Medicare payroll tax. Medicare is a federal health insurance program that covers people 65 or older and those younger with qualifying conditions. It also covers hospital care and outpatient care. The tax is calculated using gross pay. The IRS publishes Publication 15, which lists some payments not subject to the Medicare payroll tax.

The Medicare payroll tax is a part of the Federal Insurance Contributions Act (FICA). It is required by law. It supports Medicare and Social Security programs. The Medicare part pays for Medicare Part A, known as hospital insurance. It covers inpatient care in hospitals and health care for people with disabilities. Medicare part B pays for outpatient care, preventative services, and home health care. Medicare Part D pays for prescription drugs.


Whether a business owner or a worker, you must understand the difference between income and payroll taxes. You’ll find that they affect you and your family in different ways.

Unlike income tax, which is usually state-imposed, payroll taxes are imposed by the federal government. They’re used to fund social programs such as Medicare and Social Security. They’re also used to fund unemployment insurance programs.

The IRS sets the federal tax rate at 15%. The rate is calculated as a percentage of the total compensation received by an employer and employee. The amount is then deducted from employee wages.

Federal taxes are also levied on the self-employment income of self-employed individuals. For example, a self-employed individual might have to pay a Medicare tax of 12.4%.

The IRS also offers a series of tax credits to help lower the tax rate. If an employer withholds the correct amount from an employee’s wages, the employee may receive a refund. However, if the employer withholds too little, the employee may have to pay a hefty penalty.


Having a disability can be difficult for many people. While a disability can be a blessing for those unable to work, it can also put people in financial trouble. Thankfully, there are several ways to help manage the cost of a disability. Some of these include long-term disability benefits at work and long-term disability insurance policies from a private insurer.

One way to help with the cost of a disability is to get tax-deductible long-term disability insurance coverage. These plans are typically less expensive than individual policies, but they can be complicated to understand. It may also require more work to customize coverage to meet individual needs.

Another way to help cover the cost of a disability is to apply for a Supplemental Security benefit. These benefits provide incentives for people with disabilities to return to work. They are funded by federal income tax and other federal revenues.


Whether you are self-employed or run a business, you must pay taxes to the IRS. Sometimes, you can use the money you’ve set aside to pay your tax liability.

Taxpayers can choose to deduct the portion of FICA tax they pay on their own. They can also choose to set aside money for retirement plans such as IRAs and SEP IRAs. In addition, employers can write off part of the FICA tax they pay.

The tax is calculated using the IRS Form 1040-ES, also known as the Estimated Tax for Individuals. This form breaks the tax bill into four equal payments. You can also use the form to make estimated tax payments to avoid a large tax bill at the end of the year.