Payroll Taxes
Introduction
Payroll taxes are the second largest source of federal revenue, after the individual income tax. In 2025, payroll taxes brought in $1.75 trillion, or 33 percent of all federal revenue. Many American taxpayers pay much more in federal payroll taxes than they do in income taxes.
The federal government levies five different payroll taxes.
The Social Security payroll tax applies to an individual’s first $184,500 of wages in 2026 (the threshold is inflation-adjusted annually) at a rate of 12.4 percent, split between employees and employers. The same wage threshold applies when calculating Social Security benefits, capping how much high-income retirees receive in line with the cap on the taxes they paid. The Medicare payroll tax applies to all labor earnings at a rate of 2.9 percent. Self-employed workers are subject to the same taxes under the Self-Employed Contributions Act (SECA), although they may deduct the employer-side portion, 7.65 percent, for income tax purposes.
Altogether, the total payroll tax is 15.3 percent of wage and salary income for most earners. In addition, the Affordable Care Act imposed a payroll tax of 0.9 percent on wages and self-employment income of taxpayers earning above $200,000 for single filers and $250,000 for joint filers (the thresholds are not inflation-adjusted). Cumulatively, the Medicare and Social Security payroll taxes are known as FICA, or Federal Insurance Contribution Act, taxes.
Finally, the first $7,000 of an employee’s annual wages or salary, unadjusted for inflation, is subject to the 6 percent Federal Unemployment Tax Act (FUTA) tax, used to fund the federal unemployment insurance program. Employers pay this, and, as such, it does not appear as withheld income on a paystub. Employers may claim a 5.4 percent credit for state unemployment taxes paid, effectively reducing the FUTA rate to 0.6 percent.
Though the payroll tax is split between employees and employers, economic theory suggests that employees ultimately bear the employer-side payroll tax burden through lower wages. Economists consider payroll taxes to be among the least harmful ways of raising revenue. This is because payroll taxes only apply to labor income, rather than to capital income. The supply of labor is less responsive to taxation than the supply of capital, thus taxes on labor are less economically harmful per dollar of revenue raised than taxes on capital.
FICA and other payroll taxes support the Social Security and Medicare trust funds, which face large and growing imbalances projected to lead to insolvency by 2032. The essential problem is that spending is projected to grow faster than revenues due to rising costs and an aging population. This chapter considers options to change payroll tax rates and to expand the payroll tax base.
- Option 42Reduce the Employer and Employee Payroll Tax Rate by 1 Percentage Point
- Option 43Increase the Employer and Employee Payroll Tax Rate by 1 Percentage Point
- Option 44Expand the Payroll Tax Cap to Cover 90 Percent of Wages
- Option 45Apply the Payroll Tax to Earnings Above $400,000
- Option 46Eliminate the Employer-Sponsored Health Insurance Payroll Tax Exclusion
- Option 47Eliminate the Payroll Tax Exclusion for Other Employer Fringe Benefits
About the Authors
Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.
Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.
Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.
Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.
Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.
Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.
Peter Van Ness
Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.
Aleksei Shilov
Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.
Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.