For 2026, the payroll tax threshold most employers watch is the Social Security wage base of $184,500, above which no more Social Security tax is owed. Medicare tax has no cap at all, but an extra 0.9% kicks in on wages above $200,000. Federal unemployment tax stops at the first $7,000 of each employee’s wages. And self-employed workers enter the system once their net earnings reach $400 for the year.
Social Security Wage Base
The Social Security wage base is the threshold most people mean when they say “payroll tax limit.” For 2026, only the first $184,500 of each employee’s earnings is subject to the 6.2% Social Security tax.1Social Security Administration. Contribution and Benefit Base Both the employer and the employee pay 6.2%, for a combined 12.4%.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Once a worker’s year-to-date wages cross $184,500, neither side owes any more Social Security tax on that employee for the rest of the calendar year.
An employee earning $184,500 or more in 2026 contributes $11,439 in Social Security tax, and the employer matches it.1Social Security Administration. Contribution and Benefit Base The cap adjusts each year based on changes in national average wages, so it usually rises. Payroll software stops withholding automatically when a worker hits the ceiling, but the calculation breaks when someone switches jobs mid-year and both employers withhold as if the limit were fresh. The employee then claims the excess as a credit on their individual return.
Medicare Tax and the Additional Medicare Threshold
Medicare has no wage base limit. Every dollar of covered wages carries the 1.45% Medicare tax on both the employer and the employee, no matter how high earnings climb.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Combined FICA is 7.65% on each side up to the Social Security cap, then drops to 1.45% each above it.
A second threshold applies to higher earners. Employees owe an Additional Medicare Tax of 0.9% on wages exceeding $200,000 in a calendar year, or $250,000 for married couples filing jointly and $125,000 for married filing separately. Employers must start withholding the extra 0.9% once an individual’s wages pass $200,000, regardless of the employee’s filing status. Employers do not match the Additional Medicare Tax, making it the only piece of FICA the worker carries alone.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
FUTA Threshold and Who Owes It
Federal unemployment tax works on a much smaller base. FUTA applies only to the first $7,000 of wages paid to each employee per year. The gross rate is 6.0%, but employers who pay their state unemployment taxes on time and in full get a credit of up to 5.4%, bringing the effective rate down to 0.6% for most.5Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment Tax That works out to a maximum FUTA cost of roughly $42 per employee per year. Employees never pay FUTA.
You become liable for FUTA if either of two triggers is met: you paid at least $1,500 in total wages during any calendar quarter, or you employed at least one person during any part of a day in 20 different weeks during the current or prior calendar year.6U.S. Department of Labor. Unemployment Insurance Tax Topic Those weeks do not need to be consecutive. Most businesses that hire even one part-time worker will trip one of these fairly quickly. State unemployment insurance has its own taxable wage base, which varies by state and can run well above the federal $7,000 floor.
Self-Employment Tax Thresholds
Self-employed individuals pay both halves of FICA themselves, for a combined 15.3%: 12.4% for Social Security and 2.9% for Medicare. The entry point is low. You owe self-employment tax once your net self-employment earnings reach $400 for the year.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
The same Social Security wage base applies. For 2026, the 12.4% Social Security portion of self-employment tax stops at $184,500 of net self-employment income.1Social Security Administration. Contribution and Benefit Base The 2.9% Medicare portion has no ceiling. If net self-employment income exceeds $200,000 (or $250,000 on a joint return), the Additional Medicare Tax adds another 0.9% on the excess.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax You can deduct the employer-equivalent half of the self-employment tax when calculating adjusted gross income.
What Counts Toward the Thresholds
Thresholds only work if you correctly identify the wages feeding into them. Taxable wages include more than base pay. Bonuses, commissions, tips, and performance incentives all count for FICA and FUTA.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Missing a large year-end bonus when tracking whether an employee has hit the Social Security cap is one of the more common payroll errors.
Many non-cash benefits also count. The IRS requires employers to include the fair market value of taxable fringe benefits in wages. Group-term life insurance coverage above $50,000 is a frequent example: the cost of coverage over that amount gets added to the employee’s wages for Social Security and Medicare purposes. Personal use of a company vehicle, memberships in private clubs, and use of employer-owned vacation properties are taxable when they exceed de minimis value.8Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits
Payments to independent contractors are generally not subject to payroll taxes, but the IRS examines the actual working relationship rather than whatever title sits on the contract. If you control when, where, and how someone works, the IRS may reclassify that person as an employee, making all their compensation subject to FICA and FUTA retroactively.9Internal Revenue Service. Independent Contractor (Self-Employed) or Employee Separately, four categories of “statutory employees,” including certain delivery drivers and full-time life insurance agents, are treated as employees for payroll tax purposes regardless of how they are labeled.10Internal Revenue Service. Statutory Employees
Penalties for Missing the Thresholds
The IRS enforces payroll tax compliance strictly because these funds feed Social Security, Medicare, and unemployment insurance. Late deposit penalties escalate with how late you are:
- 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 an IRS notice: 15% of the unpaid deposit
These apply per deposit, so chronic lateness compounds quickly.11Internal Revenue Service. Failure to Deposit Penalty
The harshest consequence is the trust fund recovery penalty, sometimes called the “100% penalty.” When an employer withholds Social Security and Medicare taxes from employee paychecks but fails to turn that money over to the IRS, any person responsible for collecting and paying those taxes can be held personally liable for the full amount.12Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax The corporate form provides no shield here. The IRS can pursue owners, officers, and bookkeepers who had authority over the funds. “Borrowing” from withheld taxes to cover other business expenses is where many small businesses get into trouble they cannot escape.