Payroll Taxes Explained: Why They Belong in Your True Tax Rate

What are payroll taxes?

Payroll taxes are taxes taken from earned income to fund programs like Social Security and Medicare. If you are a W-2 employee, you usually see these taxes withheld from every paycheck. If you are self-employed, you pay them through self-employment tax.

Most people focus on federal and state income taxes when thinking about their tax burden. That misses a major part of the picture. Payroll taxes are separate from income taxes, and for many workers, they can be one of the largest taxes they pay each year.

For employees, the core payroll taxes are:

The IRS states that Social Security tax is 6.2% for employees and 6.2% for employers, while Medicare tax is 1.45% for employees and 1.45% for employers.

Why payroll taxes are easy to miss

Payroll taxes are often hidden in plain sight.

They usually do not show up when people talk about their "tax bracket." They are not the same as federal income tax. They are not the same as state income tax. And because they are withheld automatically from each paycheck, many people never add them up at the end of the year.

That is exactly why TrueTaxRate includes them.

If someone earns $75,000 as a W-2 employee, they may think mostly about their federal and state income tax. But before sales tax, gas tax, property tax, capital gains tax, or vehicle taxes are even considered, they are already paying payroll taxes on wages.

Why TrueTaxRate includes payroll taxes

TrueTaxRate includes payroll taxes because they are real taxes paid on labor income.

A calculator that claims to show your full tax burden but leaves out payroll taxes is incomplete. Payroll taxes reduce take-home pay, appear on paystubs, and are required for most workers. The IRS states that employers must deduct Social Security and Medicare taxes from wage payments in most cases.

For many households, payroll taxes are not a small side item. That is the core reason they belong in a "true tax rate" calculation: they materially affect how much income workers actually keep. To see your own number, try the TrueTaxRate calculator.

Payroll tax vs. income tax

Payroll taxes and income taxes are different.

Income taxes are based on taxable income after deductions, credits, filing status, and other rules. They are progressive, meaning higher income is generally taxed at higher marginal rates.

Payroll taxes are based mostly on earned income. They fund Social Security and Medicare and are typically withheld directly from paychecks.

A worker can owe little or no federal income tax and still pay payroll tax. That is one reason payroll taxes matter so much in any honest estimate of total taxes paid. We unpack the broader comparison in Income Tax vs. Total Tax Burden.

Should employer-side payroll tax count?

This is where the calculation gets more nuanced.

For W-2 workers, the employer also pays payroll taxes. This amount is not deducted directly from the employee's paycheck, so TrueTaxRate does not include employer-side payroll tax in the default calculation.

However, TrueTaxRate recommends including it because many economists argue that employer payroll taxes are borne at least partly by workers through lower wages over time. The Tax Policy Center summarizes this view directly: economists generally believe payroll taxes are ultimately borne by workers even when employers remit part of the tax.

That does not mean every worker would instantly receive a raise if employer payroll taxes disappeared. Labor markets are complicated. But from an economic burden perspective, employer-side payroll taxes add to the total cost per employee, and therefore carry a relationship with total employee compensation.

That is why TrueTaxRate uses this approach:

• Default TrueTaxRate: includes employee payroll taxes and self-employment taxes.
• Option to include employer-side payroll taxes: includes employer-side payroll taces in estimate.
• Clear explanation: employer-side payroll tax is not directly paid from your paycheck, but may still affect total labor compensation.

What about self-employed workers?

Self-employed workers generally pay both the employee and employer portions through the self-employment tax.

The IRS says the self-employment tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.

That means a freelancer, contractor, small business owner, or 1099 worker may see a much larger payroll-tax burden than a W-2 employee sees on their paycheck. Technically, self-employed workers may be able to deduct part of this tax for income-tax purposes, but the tax itself still matters when estimating total annual tax burden.

How payroll taxes affect your true tax rate

Your true tax rate is not just your income tax rate. It is the total amount of taxes you pay across the year divided by your gross income.

A simplified example:

Without payroll taxes, this person might think their tax burden is closer to 18%. With payroll taxes included, the picture changes materially.

That is the point of TrueTaxRate: not to help you file taxes, but to help you see the full burden more clearly.

What payroll taxes fund

Payroll taxes primarily fund Social Security and Medicare.

Social Security taxes help fund retirement, survivor, and disability benefits. Medicare payroll taxes help fund Medicare hospital insurance. The Social Security Administration states that Social Security and Medicare are financed primarily by employment taxes.

This page is not arguing whether those programs are good or bad. The point is simpler: if money is taken from labor income by law, it should be visible in a full tax-burden estimate.

How TrueTaxRate calculates payroll taxes

TrueTaxRate estimates payroll taxes based on the user's income type.

For W-2 wages, the calculator estimates:

• Social Security tax
• Medicare tax
• Additional Medicare tax where applicable
• Optional employer-side payroll tax if the user turns on the expanded-burden toggle

For 1099 or self-employment income, the calculator estimates:

• Self-employment tax
• Social Security portion
• Medicare portion
• Applicable income-tax interaction notes

Users can also override estimates by entering actual payroll tax amounts from a paystub, W-2, or tax return. For the full breakdown, see our methodology.

Why this matters

Leaving payroll taxes out makes the tax burden look smaller than it really is.

That is especially misleading for workers who earn most of their income from wages or self-employment. Income tax is only one layer. Payroll tax is another. Sales tax, gas tax, property tax, vehicle taxes, and capital gains taxes can add more layers on top.

TrueTaxRate includes payroll taxes because a full tax-burden estimate should answer the question people actually care about:

How much of my income ultimately goes to taxes?

Not just: What was my income tax bill?

Frequently asked questions

Sources & citations

• IRS Topic No. 751 — Social Security and Medicare Withholding Rates
• IRS — Self-Employment Tax (Social Security and Medicare Taxes)
• Tax Policy Center — Major Federal Payroll Taxes
• Social Security Administration — Financing Social Security and Medicare