How Payroll Taxes Actually Work: FICA, Withholding, and Who Pays What

$By Grace Lambert, Careers & Pay Editor · Published 2026-02-11 · Updated 2026-06-20 · Reviewed by Thomas Reid

How Payroll Taxes Actually Work — Salaryitis

Payroll Tax Is Two Different Systems Wearing One Name

People say 'payroll taxes' as if it were a single deduction, but it bundles two fundamentally different systems. The first is income tax withholding — a prepayment toward the progressive federal (and often state) income tax you reconcile every April. The second is FICA — flat-rate contributions to Social Security and Medicare that are not reconciled and do not depend on your bracket. Confusing the two is the root of most payroll misunderstandings.

The distinction matters because they behave in opposite ways. Income tax withholding rises with income in tiers and can be refunded or owed. FICA is a fixed percentage that simply comes out, with a cap on the Social Security portion. When your net pay changes mid-year for no obvious reason, one of these two systems almost always explains it.

FICA in Detail: The Numbers That Don't Change With Your Bracket

Social Security tax is 6.2% of your wages, but only up to the annual wage base ($168,600 in 2024). Once your year-to-date wages cross that ceiling, Social Security withholding stops entirely for the rest of the year — the reason high earners notice a small bump in take-home pay each autumn. Medicare is 1.45% with no ceiling at all, and an Additional Medicare Tax of 0.9% kicks in on wages above $200,000 (single).

Crucially, your employer matches your Social Security and Medicare contributions dollar for dollar. That match is invisible on your stub but real: an employee earning $80,000 costs the employer roughly $6,120 in additional FICA. Understanding this reframes negotiations — the total cost of employing you is meaningfully above your gross salary.

Marginal vs. Effective Tax Rate: The Distinction That Ends Raise Anxiety

The most damaging payroll myth is that 'a raise pushed me into a higher bracket, so I take home less.' This is essentially never true, because the U.S. uses marginal brackets. Only the dollars that fall within a bracket are taxed at that bracket's rate — not your entire income.

Suppose the 22% bracket begins at $47,150 (single, illustrative). If your income rises from $47,000 to $48,000, only the $850 above the threshold is taxed at 22%; everything below stays at 10% and 12%. Your effective rate — total tax divided by total income — always sits well below your top marginal rate. A raise can never leave you with less take-home from income tax alone.

Note: Where the myth has a grain of truth: crossing certain income thresholds can reduce means-tested benefits or credits (the ACA subsidy cliff, for example). That is a benefits-eligibility issue, not the tax brackets themselves.

How Your Employer Calculates Withholding

Employers do not guess. They take your Form W-4, annualize your pay-period wages, apply the IRS Publication 15-T withholding tables, and divide the result across your pay periods. The 2020+ W-4 asks directly about multiple jobs, dependent credits, other income, and extra withholding rather than the old 'allowances' system.

Step 2 (multiple jobs) prevents the classic under-withholding trap for two-income households.
Step 3 credits for dependents reduce withholding to reflect the Child Tax Credit.
Step 4(a) adds withholding for non-wage income like dividends.
Step 4(c) adds a flat extra dollar amount per check — the simplest fix if you owed last year.

How Payroll Taxes Actually Work — practical detail — Salaryitis

Why Bonuses Look Overtaxed

Bonuses, commissions, and other supplemental wages are commonly withheld using the flat percentage method: 22% federal for amounts up to $1 million, 37% above. That flat rate is often higher than your paycheck's marginal withholding, which is why a $5,000 bonus can arrive noticeably lighter than expected.

This is withholding, not your final tax. At filing, the bonus is simply part of your total income taxed at your real rates, and any over-withholding comes back as refund. Knowing this prevents the common error of turning down or deferring a bonus over a tax misconception.

Self-Employment Tax: Paying Both Halves

When you are a W-2 employee, your employer pays half of FICA. When you are self-employed or a 1099 contractor, you pay both halves as self-employment tax — 15.3% (12.4% Social Security up to the wage base plus 2.9% Medicare). This single fact is why a $100,000 contract is not equivalent to a $100,000 salary.

Contractors also make quarterly estimated payments to cover income tax and self-employment tax, since no employer withholds for them. You do get to deduct the employer-equivalent half of SE tax and can reduce the hit through a solo 401(k) or SEP-IRA, but the baseline lesson stands: convert any contract rate to a W-2-equivalent before comparing offers.

Key takeaways

Payroll tax bundles two systems: progressive income-tax withholding (reconciled at filing) and flat FICA (not reconciled).
Social Security is 6.2% up to the wage base; Medicare is 1.45% uncapped — both matched by your employer.
The U.S. uses marginal brackets, so a raise can never lower your take-home from income tax alone.
Bonuses are often withheld at a flat 22%, which is withholding — not your final tax rate.
The self-employed pay both FICA halves as 15.3% self-employment tax, so contract rates need a W-2-equivalent conversion.

Frequently asked questions

Will a raise put me in a higher bracket and lower my pay?

No. The U.S. uses marginal tax brackets, meaning only the income within each bracket is taxed at that bracket's rate. A raise increases your take-home pay; it can never reduce it through income tax alone.

Why was my bonus taxed so heavily?

Bonuses are usually withheld at the flat supplemental rate of 22% federally (37% above $1 million). This is withholding, not your final tax. At filing, the bonus is taxed at your actual rates and any excess is refunded.

Does Social Security tax ever stop during the year?

Yes. Social Security tax (6.2%) applies only up to the annual wage base ($168,600 in 2024). Once your year-to-date wages exceed it, that portion stops for the rest of the year. Medicare (1.45%) has no cap.

What is the difference between marginal and effective tax rate?

Your marginal rate is the rate on your last dollar earned (your top bracket). Your effective rate is total tax divided by total income, which is always lower because earlier dollars are taxed in lower brackets.

Why do contractors pay more tax on the same income?

Contractors pay self-employment tax of 15.3% — both the employee and employer halves of FICA that a W-2 employer would otherwise cover. Always convert a 1099 rate to a W-2 equivalent before comparing it to a salary.