Tax Glossary
Key Tax TermPayroll Tax
Payroll taxes are taxes taken out of your paycheck by your employer and sent to the government. They mainly fund Social Security and Medicare, and can also include federal and state income tax withholding.
💡Simple definition
Payroll tax is the group of taxes that are based on your paycheck. Employers withhold these taxes from your wages and send them to the IRS and state tax agencies on your behalf.
📋Main types of payroll taxes
When you look at your pay stub, you'll usually see:
- •FICA taxes (Social Security + Medicare)
- •Federal income tax withholding
- •State income tax withholding (in most states)
- •Sometimes local income tax withholding (certain cities/areas)
👥Who pays payroll taxes?
For employees, payroll taxes are typically split between:
👤You (Employee)
Pay your share through paycheck withholding.
🏢Your Employer
Pays a matching share for Social Security and Medicare.
⚠️ Self-employed? You pay both the employer and employee portions as self-employment tax.
🎯What do payroll taxes fund?
Payroll taxes primarily fund social insurance programs, including:
- ✓Social Security retirement benefits
- ✓Social Security disability and survivor benefits
- ✓Medicare hospital insurance (Part A)
🔄Payroll tax vs. income tax
Payroll taxes and income taxes are related but not the same:
Payroll taxes
Mainly Social Security & Medicare ( FICA). Based on wages, with set percentages.
Income tax
Based on taxable income and calculated using tax brackets and credits.
Both may be withheld on the same paycheck, but they serve different purposes and are calculated differently.
🧾Quick example on a pay stub
Suppose your gross pay for a paycheck is $2,000. You might see:
- •Social Security tax: $124 (6.2%)
- •Medicare tax: $29 (1.45%)
- •Federal income tax: e.g., $180 (varies)
- •State income tax: e.g., $60 (varies by state)
Your net pay is what you receive after all these payroll tax withholdings (and other deductions like benefits).
⭐Why payroll taxes matter to you
Understanding payroll taxes helps you:
- ✓Read your pay stub and know where your money goes
- ✓Estimate your take-home pay
- ✓Plan for Social Security and Medicare benefits later in life
- ✓Understand why self-employment tax feels higher
Browse More Tax Terms
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