What Is Federal Payroll Tax and How Does It Work?

Federal payroll tax is the money taken out of wages to fund Social Security, Medicare, and unemployment insurance. If you’re an employee, 7.65% of your gross pay is withheld for Social Security (6.2%) and Medicare (1.45%), and your employer pays a matching 7.65% on top. A third payroll tax, the federal unemployment tax, is paid entirely by employers. Self-employed workers pay both sides themselves at a combined 15.3%.

What Comes Out of Your Paycheck

The Social Security and Medicare deductions on your pay stub come from the Federal Insurance Contributions Act, or FICA.1Office of the Law Revision Counsel. 26 USC Ch. 21 – Federal Insurance Contributions Act Social Security (formally Old-Age, Survivors, and Disability Insurance) pays monthly benefits to retirees, people with qualifying disabilities, and surviving family members. Medicare covers hospital care and related services for people 65 and older and certain younger individuals with disabilities.

You and your employer each pay 6.2% for Social Security and 1.45% for Medicare, a combined 7.65% from each side.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Your employer withholds your share from each paycheck and sends it to the IRS with its matching contribution. The money goes into federal trust funds that pay current benefits.

The Social Security Wage Cap

Social Security tax only applies up to a set income level each year. For 2026, that cap is $184,500. Once your earnings for the year cross that threshold, neither you nor your employer owes more Social Security tax on the excess. If you earn at least $184,500, your Social Security contribution maxes out at $11,439 for the year, and your employer pays the same.3Social Security Administration. Contribution and Benefit Base The cap is tied to the national average wage index and generally rises each year.

Medicare Has No Cap, and High Earners Pay More

Medicare tax applies to every dollar of wages. You and your employer each pay 1.45% no matter how high your earnings go.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates

High earners face the Additional Medicare Tax, an extra 0.9% on wages above $200,000 for single filers and $250,000 for married couples filing jointly.4Office of the Law Revision Counsel. 26 U.S. Code 3101 – Rate of Tax Your employer starts withholding this once your wages pass $200,000 in a calendar year, regardless of filing status. If your actual threshold works out differently at tax time, you reconcile on your return.5Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Employers do not match the Additional Medicare Tax; it is entirely your cost.

Federal Unemployment Tax (FUTA)

The Federal Unemployment Tax Act funds the administrative backbone of the unemployment insurance system. Your state runs its own benefits program, but federal FUTA revenue helps cover administrative costs and funds extended unemployment compensation during periods of unusually high joblessness.

The statutory FUTA rate is 6.0% on the first $7,000 of wages paid to each employee per year.6Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax In practice, most employers pay far less. Paying state unemployment tax on time earns a credit of up to 5.4% against the federal rate, dropping the effective FUTA rate to 0.6% and the maximum per-employee cost to $42 a year.7Employment & Training Administration. Unemployment Insurance Tax Topic

FUTA is paid entirely by the employer. You will never see a FUTA line on your pay stub.

Self-Employment Tax

Work for yourself and there’s no employer to split FICA with, so you pay both halves. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.8Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The same $184,500 Social Security cap applies to net self-employment earnings in 2026, and Medicare has no cap.3Social Security Administration. Contribution and Benefit Base

Self-employed individuals with net earnings above $200,000 (single) or $250,000 (married filing jointly) also owe the 0.9% Additional Medicare Tax on the excess.8Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax

There is a real break here. When you file your income tax return, you can deduct half of your self-employment tax as an adjustment to gross income. This mirrors the fact that employers deduct their half of FICA as a business expense.9Internal Revenue Service. Topic No. 554, Self-Employment Tax You calculate the deduction on Schedule SE and report it on Schedule 1 of Form 1040.

Household Workers Count

Pay a nanny, housekeeper, or other household worker $3,000 or more in cash wages during 2026 and you become a household employer, owing FICA on those wages.10Internal Revenue Service. Household Employer’s Tax Guide The same 6.2% Social Security and 1.45% Medicare rates apply. You are responsible for both the employer share and for withholding the employee share. Social Security applies to wages up to $184,500; Medicare applies to all wages. Paying “under the table” does not eliminate the obligation. It just means you have not met it yet.

How Employers File and Deposit

Employers carry most of the mechanical burden of the payroll tax system: calculating withholding, deducting the employee’s share, adding the matching share, and sending the total to the IRS. Two obligations run alongside each other, on different schedules: reporting and depositing.

The Forms

Form 941 is a quarterly return covering federal income tax withheld from paychecks plus both shares of Social Security and Medicare taxes.11Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return Once you file your first Form 941, you must file one every quarter, even in quarters with nothing to report, unless you qualify as a seasonal employer or are filing a final return.12Internal Revenue Service. Instructions for Form 941 (Rev. March 2026) Each quarterly return is due by the last day of the month following the end of the quarter: April 30, July 31, October 31, and January 31.

Form 940 is the annual FUTA return, due January 31 of the following year. Employers who deposited all FUTA tax on time get an automatic extension to February 10.13Internal Revenue Service. Topic No. 759, Form 940, Employer’s Annual Federal Unemployment Tax Return

At year-end, employers furnish W-2s to employees and file them with the Social Security Administration. For tax year 2026, both are due by February 1, 2027.14Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3

Deposit Schedules

The IRS assigns you either a monthly or semiweekly deposit schedule based on total tax reported during a four-quarter lookback period ending the previous June 30.15Internal Revenue Service. Notice 931 Deposit Requirements for Employment Taxes If your lookback liability was $50,000 or less, you are a monthly depositor and deposit by the 15th of the month following each pay period. If it exceeded $50,000, you are a semiweekly depositor: taxes on wages paid Wednesday through Friday are due the following Wednesday, and taxes on wages paid Saturday through Tuesday are due the following Friday.16Internal Revenue Service. Employment Tax Due Dates

One override applies to everyone. If you accumulate $100,000 or more in tax liability on any single day, you must deposit by the next business day. A monthly depositor who hits that threshold moves to the semiweekly schedule for the rest of that year and all of the following year.15Internal Revenue Service. Notice 931 Deposit Requirements for Employment Taxes New businesses default to the monthly schedule for their first calendar year because they have no lookback history.

Penalties for Late or Unpaid Payroll Tax

Late deposits trigger tiered penalties based on how many days you miss the deadline:17Internal Revenue Service. Failure to Deposit Penalty

  • 1 to 5 days late: 2% of the unpaid deposit.
  • 6 to 15 days late: 5% of the unpaid deposit.
  • More than 15 days late: 10% of the unpaid deposit.
  • More than 10 days after the first IRS notice: 15% of the unpaid deposit.

These percentages do not stack. A deposit 10 days late draws a 5% penalty, not 2% plus 5%.

The Trust Fund Recovery Penalty

This is where payroll tax mistakes get personal. The Social Security and Medicare taxes you withhold from employees are “trust fund” taxes because you hold them in trust for the government. If they don’t get paid, the IRS can assess a penalty equal to 100% of the unpaid amount against any person who was responsible for collecting or paying the taxes and willfully failed to do so.18Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax

“Person” reaches well beyond the business owner. It can include officers, partners, payroll managers, bookkeepers, or anyone with authority over which bills get paid. “Willfully” does not require bad intent. Choosing to pay rent, suppliers, or even employee wages instead of remitting trust fund taxes is enough to meet the standard. The penalty equals the full amount of the tax, effectively doubling the debt. For a small business behind on payroll taxes, this is often what turns a manageable problem into an unrecoverable one.

Where Federal Income Tax Withholding Fits In

Federal income tax withholding appears on every pay stub alongside FICA but works differently. Social Security and Medicare are flat-rate and split between employer and employee. Income tax withholding varies by person, based on the W-4 you submit, your pay, your filing status, and any adjustments you claim.

Income tax withholding is not technically a payroll tax in the way economists use the term, because the money goes into the general fund rather than an earmarked trust fund. Employers report and deposit it through the same system, though. Form 941 covers income tax withholding alongside FICA, and the same deposit schedule applies.11Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return If you run payroll, you handle both as one process.

2026 Payroll Tax Rates at a Glance