Payroll Taxes to fund Social Security, Medicare HI

Overview:  Payroll taxes raised 35% of Federal revenues for FY 2018 — $1.2 trillion.  Most low- and middle-income taxpayers pay more in payroll taxes than income taxes.

  • Payroll taxes are comprised of Social Security taxes and Medicare Hospital Insurance taxes.
  • Social Security and Medicare payroll tax rates are, respectively, 12.4% and 2.9% — half paid by the employer and half by the employee (i.e., 7.65% each).
  • Higher income individuals are subject to an additional HI tax of 0.9%.  (For married taxpayers filing jointly, combined wages above $250,000 are subject to the additional 0.9% HI tax.  The threshold for single and head of household filers is $200,000.)
  • Self-employed individuals pay self-employment tax, which is roughly equivalent to both halves of the tax.
  • Revenues from Social Security payroll taxes pay for retirement and disability benefits, while the Medicare payroll tax pays for Medicare Part A, which is the portion of Medicare that provides elderly and disabled Americans with hospital insurance (HI).
  • Wages subject to the tax is capped:  For 2018, Social Security payroll taxes are levied on the first $128,400 of wages — with the cap adjusted upward each year to reflect increases in average wages in the economy.
  • Unlike the Social Security payroll tax, the 2.9% Medicare tax is assessed against all wage income.
  • Unemployment payroll tax 0.6%:  Employers may also be subject to a federal unemployment insurance payroll tax at an effective tax rate of 0.6% on the first $7,000 of wages.  The revenues are used to pay administrative costs of the unemployment insurance (UI) program;  State UI taxes generally pay for UI benefits.  Background report on UI tax