- 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.
See: How Progressive Is Social Security When Old Age and Disability Insurance Are Treated as a Whole?
- The employee portion of payroll taxes exceeded income tax liabilities for an estimated 48 percent of all taxpayers in 2014. Counting both employer and employee shares of the payroll tax increases that percentage to 68 percent.
See: Distribution of Federal Payroll and Income Taxes by Cash Income Percentile, 2014
- Self-employed workers must pay both the employee and employer portions of the tax: 12.4 percent for the Social Security tax and 2.9 percent for the Medicare tax. This means there is a 15.3 percent tax rate on earnings up to the Social Security tax cap and a 2.9 percent tax rate on earnings above the Social Security tax cap. But self-employed workers can deduct on their income tax returns half of the payroll taxes they pay.
- Beginning in 2013, high-income workers will pay an Additional Medicare Tax equal to 0.9 percent of earnings above unindexed thresholds: $200,000 for single people and $250,000 for the combined earnings of married couples. The tax was imposed by the 2010 healthcare legislation.
- The Federal Unemployment Tax Act (FUTA) funds state unemployment insurance programs with a tax on employers equal to 6 percent of the first $7,000 of earnings for each worker. However, employers are allowed a credit of up to 5.4 percent for unemployment taxes paid to states, making the net FUTA tax just 0.6 percent. Employers in states that borrow from federal unemployment funds and do not repay their loans within two years must pay an additional tax. In 2015, employers in 9 states will pay such a surtax ranging from 0.3 percent to 1.5 percent.
See: State Unemployment Tax Rates, also Department of Labor Unemployment Insurance Data
Payroll Tax Statistics:
Historical data on payroll tax receipts
Payroll tax burdens for sample families
Historical tax rates for Social Security and Medicare taxes.
Fixing Social Security Isn't Hard Howard Gleckman, TaxVox, 2011
Payroll Taxes Cover About a Third of Medicare Costs Donald Marron, TaxVox, 2012
For general discussion of the payroll tax, see
Payroll Tax, Federal
For discussions of the distributional effects of Social Security, see
How Progressive Is Social Security When Old Age and Disability Insurance Are Treated as a Whole? by Eugene Steuerle, Adam Carusso, and Lee Cohen, 2004
Social Security and Medicare Taxes and Benefits Over a Lifetime: a 2012 Update by Eugene Steuerle and Caleb Quackenbush
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