PAYROLL TAX
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Federal payroll tax is 7.65%; payroll tax is imposed equally on the employee and employer on annual wages
Summary
Payroll tax is a federal tax that funds Social Security and Medicare programs. The total rate is 15.3% (7.65% paid by employee + 7.65% paid by employer) on wages up to certain income limits. This includes 6.2% for Social Security and 1.45% for Medicare from each party. Unlike income tax which varies by tax bracket, payroll tax is a flat rate applied to most earned income.
Usage Context
Essential for understanding employment costs, business expenses, take-home pay calculations, and government revenue sources. Critical when analyzing labor markets, business budgeting, and social insurance programs.
Common Confusions
- Thinking payroll tax is the same as income tax
- Not understanding that employers pay a matching amount
- Confusing the employee rate (7.65%) with the total rate (15.3%)
- Assuming payroll tax applies to all types of income
- Not knowing about the Social Security wage cap
