Payroll Tax vs Income Tax: What's the Difference?

Side-by-side comparison

FICA rates and wage base for 2026

Social Security (OASDI) tax is 6.2% for the employee and 6.2% for the employer on wages up to $184,500 in 2026, up from $176,100 in 2025. The maximum employee Social Security tax for 2026 is therefore $11,439. Medicare (HI) tax is 1.45% each on all wages, with no cap. Employers must also withhold an extra 0.9% Additional Medicare Tax on an employee's wages above $200,000 in a year; the employer does not match it. The final liability depends on filing status ($250,000 for married filing jointly, $125,000 married filing separately) and is settled on Form 8959.

Self-employed people pay both halves as self-employment tax: 15.3% on 92.35% of net profit, with half deductible for income tax purposes.

Employer-only payroll taxes

Employers also pay federal unemployment tax (FUTA): 6.0% on the first $7,000 of each employee's wages, usually reduced to an effective 0.6% ($42 per employee per year) by the credit for state unemployment taxes paid. State unemployment insurance (SUTA) rates and wage bases vary by state and employer history. A few states also require employee contributions for disability or paid family leave, such as California SDI and New York PFL.

Worked example: $70,000 salary, single, 2026

Note that FICA ($5,355) is almost as large as income tax ($6,570) at this income. For workers earning under roughly $60,000, payroll taxes are often larger than federal income tax, especially for families with children who receive the child tax credit.

• Employee Social Security: $70,000 x 6.2% = $4,340
• Employee Medicare: $70,000 x 1.45% = $1,015
• Federal income tax: taxable income $70,000 - $16,100 = $53,900; tax $5,800 + 22% x $3,500 = $6,570
• Total federal tax on the employee: $11,925, about 17% of salary
• Employer FICA: another $5,355, plus FUTA and state unemployment tax

Why new deductions don't reduce payroll tax

The One Big Beautiful Bill Act deductions for qualified tips, overtime premium pay, car loan interest and seniors (2025 through 2028) reduce taxable income for federal income tax only. Social Security and Medicare are still owed on tips and overtime. Likewise, traditional 401(k) deferrals avoid income tax now but are still subject to FICA, while cafeteria-plan health premiums generally avoid both.

Getting excess Social Security tax back

If you work two or more jobs and your combined wages exceed $184,500 in 2026, each employer withholds Social Security separately, so you may overpay. The excess (anything above $11,439 total) is claimed as a credit on Schedule 3 of Form 1040. If a single employer withheld too much, you must ask that employer to correct it.

Who pays what: employee, employer, self-employed

Economists generally find that workers bear most of the employer share of payroll tax in the form of lower wages, which is why the total cost of an employee to a business is meaningfully higher than salary: a $70,000 salary costs the employer at least $75,397 after FICA and net FUTA, before benefits and state unemployment tax.

Which is bigger for you? Payroll tax vs income tax by salary

For a single worker with no credits, payroll tax is the bigger federal bite up to about $50,000 of wages; with child tax credits, the crossover comes at a much higher income. The table compares employee FICA with federal income tax for a single filer with wages only, the 2026 standard deduction and no credits. FICA includes the 0.9% Additional Medicare Tax withheld on wages above $200,000.

What your payroll tax buys

Unlike income tax, FICA is tied to benefits in your own name. Covered earnings earn Social Security credits, up to four a year. Most people need 40 credits, about ten years of work, to qualify for retirement benefits, and the same work history generally gives you premium-free Medicare Part A at 65. Your retirement benefit is based on your highest 35 years of earnings, adjusted for wage growth.

The wage base works both ways. Earnings above $184,500 in 2026 are not taxed for Social Security, and they don't count toward your future benefit either. The Medicare tax has no cap and no direct link to benefit size. Everyone with enough work credits gets the same Part A coverage.

Check your earnings record each year at my Social Security (ssa.gov). If an employer reported your wages wrong, it is much easier to fix within about three years than decades later.

State payroll deductions on employees

Most states have no employee payroll tax, but several take a percentage of wages for disability, paid leave or long-term care. These come out next to FICA on your stub and are separate from state income tax.

• California SDI: 1.3% of all wages in 2026, with no wage cap.
• New York Paid Family Leave: 0.432% of wages in 2026, up to a maximum of $411.91 a year, plus disability insurance of up to $0.60 a week.
• Washington: PFML premiums (the employee pays about 0.81% of wages up to the Social Security wage base) and WA Cares at 0.58% with no cap, even though Washington has no income tax.