This Labor Day, How High is the Tax Burden on American Labor?

Labor Day was created in the 1880s to celebrate “the contributions workers have made to the strength, prosperity, and well-being of our country.” Yet, in addition to contributing to the United States economy, workers also contribute a great deal to the government every year, in the form of taxes on labor.

In 2014, the average wage worker saw his or her labor income decrease by 31.5 percent due to federal, state, and local taxes, according to the OECD. Put another way, on average, U.S. workers take home 68.5 percent of what an employer spends to employ them.

This tax burden on labor stems from several different sources.

First, the federal government collects two payroll taxes directly from workers’ paychecks. The Social Security payroll tax is levied at a rate of 6.2 percent on a worker’s first $118,500 of earnings, while the Medicare payroll tax is levied at 1.45 percent on all labor earnings. Beginning in 2013, the federal government began to collect an additional Medicare tax of 0.9 percent on labor earnings above $200,000 for single filers and $250,000 for joint filers.

In addition to these payroll taxes collected from workers, the federal government also collects payroll taxes from employers, at the same rates of 6.2 percent and 1.45 percent. Employers also pay a small unemployment payroll tax of 0.6 percent on wages. It is widely accepted that these payroll taxes, even though technically imposed on employers, fall mainly on workers, in the form of lower wages and salaries.

Between payroll taxes on employees and those on employers (as well as some payroll taxes collected by states and cities), the average U.S. worker sees a payroll tax burden of $8,741.

Then, workers are also subject to federal, state, and local income taxes. Federal tax rates on labor range from 10 percent to 39.6 percent, depending on the taxpayer’s income bracket. Combined with state and local income taxes, working individuals can face top tax rates of over 50 percent on labor income.

When taking all of these income taxes into account as well, the average U.S. worker faces an income tax burden of $8,631.

All in all, the average U.S. worker shoulders a burden of $17,372 in taxes on their labor income – a reminder that U.S. workers contribute, not only to society, but also the federal treasury.