Payroll taxes are taxes on wages and earnings that fund Social Security benefits, Medicare Hospital Insurance, unemployment compensation, and various smaller retirement programs. The two largest payroll taxes -- the Social Security tax and the Medicare tax -- accounted for 34 percent of federal revenues in 2014, or roughly $1 trillion.
- The Federal Insurance Contributions Act mandates collection of Social Security and Medicare taxes and is the source of the acronym “FICA”.
- Employees and employers each pay 6.2 percent of wages in Social Security tax, yielding a combined rate of 12.4 percent. In 2015, the tax applies to the first $118,500 of a worker's annual earnings; this amount is indexed each year by the average change in workers’ pay. An employee and her employer will thus each pay a maximum tax of $7,347 in 2015.
- Employees and employers also each pay Medicare tax equal to 1.45 percent of all wages, for a combined rate of 2.9 percent. Unlike the Social Security tax, there is no limit on the amount of wages subject to taxation for the Medicare tax.
- The payroll tax has grown from about one-sixth of federal revenue in 1960 to more than one-third in 2015 largely because of the advent of Medicare in 1965 and a sharp increase in Social Security taxes in 1983.
- As part of a short-term stimulus, the employee rate of the Social Security tax was cut to 4.2 percent for 2011 and 2012. It returned to 6.2 percent in 2013.
- Although both employees and employers pay FICA taxes, most economists believe that the employer’s share is fully offset by reduced wages and thus the entire economic burden of the tax ultimately falls on workers.
- Payroll taxes are regressive; the constant tax rate and cap on taxable earnings cause the
tax rate to decrease as income increases. However, if both lifetime benefits and taxes are taken into account, the Social Security program appears to be mildly progressive.
Payroll Tax Statistics: