Payroll taxes are calculated by applying set percentages to an employee’s wages in a specific order: Social Security at 6.2% up to a yearly earnings cap, Medicare at 1.45% on every dollar, and federal income tax based on the employee’s Form W-4 and the IRS tax tables. Understanding how payroll taxes are calculated means knowing which pieces are flat rates, which depend on the employee’s own paperwork, and where pre-tax deductions fit into the sequence. For 2026, the combined employee share of Social Security and Medicare is 7.65% of wages, with the Social Security portion stopping once earnings pass $184,500 for the year.
The Order the Numbers Come Out
Payroll math only works if the steps run in the right sequence. Mixing them up produces the wrong taxable wage and the wrong withholding. For each pay period, a payroll system works through the paycheck like this:
- Start with gross pay for the period: regular wages, overtime, bonuses, and commissions.
- Subtract pre-tax deductions. Traditional 401(k) contributions, health insurance premiums, and flexible spending account contributions come out before taxes are figured. The 2026 employee 401(k) contribution limit is $24,500, with an $8,000 catch-up for workers 50 and older, and $11,250 instead of $8,000 for workers aged 60 to 63.1Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
- Apply Social Security tax at 6.2% to the remaining wages, but only until year-to-date earnings hit $184,500.
- Apply Medicare tax at 1.45% to all remaining wages, with no cap. Add another 0.9% on the portion above $200,000 once year-to-date pay crosses that line.
- Withhold federal income tax using the W-4 and the tables in IRS Publication 15.
- Withhold state and any local income taxes that apply.
- Subtract post-tax deductions such as Roth 401(k) contributions, wage garnishments, and union dues.
What remains is net pay. The employer separately pays a matching 6.2% Social Security and 1.45% Medicare on the employee’s gross wages, plus federal and state unemployment taxes that never appear on the paycheck.
Social Security Tax
Social Security tax is a flat 6.2% withheld from the employee and a matching 6.2% paid by the employer, for a combined 12.4%. It applies only up to the annual wage base limit, which is $184,500 for 2026.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Once year-to-date wages reach that cap, withholding stops for the rest of the calendar year and the employer stops paying its share as well.
At the full wage base, the employee and the employer each pay a maximum of $11,439 in Social Security tax for the year.3Social Security Administration. Contribution and Benefit Base Someone who works two jobs will have each employer withhold independently up to the cap on the wages that employer pays, which can produce an overpayment. That excess is claimed back on the annual tax return.
Medicare Tax
Medicare tax has no wage base limit. Every dollar of wages is taxed at 1.45% on the employee side and another 1.45% from the employer.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Withholding continues no matter how high year-to-date pay climbs.
Higher earners pay an Additional Medicare Tax of 0.9%. Employers begin withholding this once an employee’s wages from that employer cross $200,000 in the calendar year, regardless of filing status. The thresholds that actually determine what the employee owes on the return depend on how they file:
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
Because employers use the flat $200,000 trigger, the paycheck withholding does not always match the final liability. A married couple filing jointly with combined wages between $200,000 and $250,000 may recover the difference at tax time; someone married filing separately with wages above $125,000 may owe more than was withheld.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Only the employee pays the extra 0.9%; the employer has no matching obligation for it.5Internal Revenue Service. Understanding Employment Taxes
Federal Income Tax Withholding
Unlike FICA, federal income tax withholding is not a flat rate. The amount pulled from each paycheck depends on the employee’s wages, filing status, dependents, and any adjustments claimed on IRS Form W-4. Employees complete the W-4 when hired and can update it whenever their circumstances change.6Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
The employer feeds the W-4 information into the tables in IRS Publication 15 (Circular E).7Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Publication 15 offers a wage bracket method that works as a lookup and a percentage method that uses a formula; both give the same answer. The aim is for withholding across the year to come close to the employee’s actual tax liability, so the return produces neither a large balance due nor an oversized refund.
Employees with significant outside income, such as freelance work or investment returns, can ask for extra withholding on the W-4 to avoid an underpayment penalty. Workers with more than one job can use the IRS Tax Withholding Estimator or the multiple-jobs worksheet on the W-4 to set the right amount.
A Worked Example
Consider an employee who earns $5,000 in gross biweekly pay and contributes $500 per pay period to a traditional 401(k). After the pre-tax retirement deduction, taxable wages for FICA come to $4,500. Social Security withholding is $4,500 × 6.2% = $279. Medicare withholding is $4,500 × 1.45% = $65.25. Assume federal income tax withholding from the tables works out to $400 based on the W-4. Total deductions before any state taxes or post-tax items come to $1,244.25, leaving net pay of $3,755.75. The employer separately owes $279 in Social Security and $65.25 in Medicare on its side of the paycheck, plus unemployment tax.
Taxes the Employer Pays on Top
Two payroll taxes are the employer’s alone and never appear as a deduction on the employee’s stub. The first is federal unemployment tax under FUTA, imposed at 6.0% on the first $7,000 of each employee’s wages per year. Employers who pay their state unemployment taxes on time generally receive a credit of up to 5.4%, dropping the effective federal rate to 0.6%, or roughly $42 per employee per year.8Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements The credit is reduced in states that have not repaid federal unemployment loans within two years; the Department of Labor publishes the list each year.9U.S. Department of Labor. FUTA Credit Reductions
The second is state unemployment tax. Rates and taxable wage bases vary widely by state and depend on the employer’s industry and claims history. New employers usually start at a default rate until enough history builds up for an experience-based rate. In states with high wage bases, the state portion often costs more than the federal portion.
If You’re Self-Employed
Self-employed workers pay both halves of Social Security and Medicare themselves, a combined 15.3%: 12.4% for Social Security and 2.9% for Medicare.10Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The same $184,500 Social Security wage base applies, and the 0.9% Additional Medicare Tax kicks in at the same filing-status thresholds employees see.
The rate is not applied to every dollar of net self-employment income. Net earnings are first multiplied by 92.35%, and the 15.3% is applied to that reduced figure. This adjustment mirrors the fact that employees do not pay FICA on the employer’s share. Half of the self-employment tax can then be deducted from adjusted gross income on the personal return, which lowers income tax but does not lower the self-employment tax itself.11Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)