Payroll Taxes

Unless you’re self-employed, it is easy to forget about the Social Security and Medicare payroll tax. Your employer takes the payroll tax from your paycheck before it does almost anything else, including deduct those 401(k) contributions. Those 401(k) contributions may reduce your income for purposes of calculating income taxes, but they don’t shrink the income that’s subject to the payroll tax. Moreover, unless you have self-employment income, you won’t even be reminded that you’re paying the payroll tax when you fill out your federal tax return.

Yet, for many folks, the payroll tax takes a bigger bite out of their income than the federal income tax. Let’s say you are the sole breadwinner in a family of four and you earn 2015’s U.S. median household income of $56,516, as calculated by the Census Bureau. Your only income comes from your job and you claim the standard deduction. In 2017, you would lose $3,210 to federal income taxes and $4,323 to the payroll tax—and this assumes your employer pays half the payroll tax.

Surprised? There may be seven federal income tax brackets ranging from 10% to 39.6%. But for many families, only the 10% and 15% brackets come into play, plus they can take advantage of exemptions, deductions and credits. That means their marginal tax rate is fairly low, and their average tax rate is even lower. By contrast, in 2017, the payroll tax for most folks is a flat 15.3%, with 7.65% paid by employees and 7.65% by employers. That 7.65% is further divided, so that 6.2% goes to Social Security and 1.45% to Medicare.

High-income employees get some relief from the payroll tax once their salary for 2017 crosses the $127,200 mark. At that juncture, they no longer have to pay any more Social Security tax, though they have to pay the 1.45% Medicare tax on every dollar of income they earn. If their total income—including investment income—is high enough, however, they may get hit with a nasty surprise: the Medicare surtax.

Next: Marginal vs. Average Tax Rates

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