When you agree to a salary of $100,000 per year, you quickly realize your take-home pay is significantly less. The gap between your gross pay and net pay is primarily driven by payroll taxes and income tax withholdings required by law.
In the United States, payroll taxes specifically refer to FICA (Federal Insurance Contributions Act) taxes, which fund Social Security and Medicare. These are separate from federal and state income taxes, which are also withheld from your paycheck based on your W-4 form.
The FICA breakdown: Social Security and Medicare
The FICA tax rate is 15.3% of wages, but it is split equally between the employee and the employer. As an employee, 7.65% is deducted from your paycheck. This consists of 6.2% for Social Security and 1.45% for Medicare.
For example, on a $2,000 biweekly paycheck, $124 is withheld for Social Security and $29 for Medicare. Notably, the Social Security portion is capped; in 2024, you only pay the 6.2% on the first $168,600 of income. Medicare tax, however, has no wage base limit and actually increases by an additional 0.9% for high earners.
The employer's hidden burden
Employees only see the 7.65% deducted from their checks, but employers must match that exact amount. When an employer pays you $100,000, they are also paying $7,650 directly to the government for your FICA taxes. This is a cost of employment that does not appear on your pay stub.
Self-employed individuals must pay both the employee and employer portions, known as the Self-Employment Tax (15.3%). However, they are allowed to deduct the employer-equivalent portion when calculating their adjusted gross income for federal taxes.