The Payroll Tax

The payroll tax is the federal tax collected on wages to fund Social Security and Medicare. It is split between the employee and the employer and applies to wages up to an annual cap that is adjusted each year.

The federal payroll tax, formally the Federal Insurance Contributions Act tax or FICA, was created by the Social Security Act of 1935. The basic structure has changed less than most parts of the tax code. Workers pay a percentage of their wages, employers pay an equal percentage, and the combined revenue funds the Social Security and Medicare trust funds. As of the mid-2020s, the Social Security portion is 6.2 percent each for employee and employer, for a combined 12.4 percent, on wages up to an inflation-adjusted cap that rises each year. The Medicare portion is 1.45 percent each, for a combined 2.9 percent, with no cap and an additional 0.9 percent on high earners. Self-employed workers pay both halves through the self-employment tax. The payroll tax is the largest federal tax most American workers pay. For roughly three-quarters of households, payroll tax liability exceeds income tax liability. The wage cap on the Social Security portion makes the tax regressive as a share of total income, since high earners stop paying once they exceed the cap. Raising or removing that cap is the central progressive proposal for shoring up Social Security solvency. Conservatives generally argue that removing the cap would sever the program's historical link between contributions and benefits and turn it from earned insurance into a transfer program. The argument over the payroll tax is, in practice, the argument over how to finance the largest program in the federal budget.