Social Security and the Federal Payroll Tax - AMAC Foundation
Nearly all workers pay it, but very few understand it – the Federal Payroll Tax. With few exceptions,[1] everyone who works and earns a paycheck is subject to the federal payroll tax on their earnings. That’s more than 180 million American workers, about 93% of the U.S. non-government workforce.
The payroll tax, first levied in 1937, is a primary source of revenue for America’s Social Security program and, since 1965, for “Part A” of the federal Medicare program. The payroll tax provides over 90% of the funding needed for the Social Security program. It is a significant source of financing for Medicare’s “Part A” (which covers inpatient hospitalization expenses for enrolled senior citizens).
How is the Payroll Tax Applied?
Those working for a corporate employer are taxed under the Federal Insurance Contributions Act (FICA) which mandates that 7.65% of each employee’s earnings (up to an annual wage cap) be withheld as FICA tax. The employer must match that amount, so total FICA tax contributions collected are 15.3% of each corporate employee’s gross earnings, and are paid by the employer to the Federal Government either monthly or semi-weekly.
Self-employed Americans do not pay a FICA tax but instead are required to pay a “Self-Employment Tax” equivalent to both the employee and the employer portion of the FICA tax. Self-employed individuals pay 15.3% from their net earnings from self-employment (up to the annual wage cap) as reported on their annual federal income tax return.
How is the Payroll Tax Revenue Used?
Payroll taxes collected for Social Security are deposited into special Social Security Trust Funds (called the “OASDI” trust funds), and taxes collected for Medicare Part A are deposited into a special Medicare Trust Fund (the “HI” trust fund). Social Security and Medicare Part A benefits are paid using money held in these trust funds.
The FICA and self-employment taxes collected by the federal government help fund the Social Security and Medicare programs. Of the 7.65% individual FICA tax levied, 6.2% goes to Social Security and 1.45% goes to Medicare, both matched by the employer. Of the 15.3% self-employment tax levied, 12.4% goes to Social Security, and 2.9% goes to Medicare.
The Social Security portion of FICA and self-employment taxes are levied only on earnings up to a wage cap for each year. The wage cap, also known as the “payroll tax cap,” automatically increases each year with changes to the Average National Wage Index. For 2025, FICA and Social Security self-employment taxes are levied on earnings up to $176,100. However, the 1.45%[2] Medicare portion of FICA and self-employment tax is paid by all earners[3] on 100% of their earnings – there is no wage cap for the Medicare portion of FICA or self-employment tax.
The following charts illustrate the 2025 wage cap and tax rates:
Payroll Tax Cap on Earnings
| Payroll Tax Type | 2025 Payroll Wage Cap |
| Social Security (6.2%) | $176,100 |
| Medicare (1.45%) | No Limit |
Payroll Tax Rate
| Employee | 7.45% (6.2% SS & 1.45% Medicare) |
| Employer | 7.45% (6.2% SS & 1.45% Medicare) |
| Self-Employed | 15.3% (12.4% SS & 2.9% Medicare) |
Contributions workers make by paying Federal Payroll Taxes (FICA or self-employment) help fund Social Security and Medicare, thereby earning Social Security benefits and free Medicare Part A (hospitalization) coverage. Whenever revenue for either program exceeds benefit expense, the excess is held in reserve in the Trust Fund. As of the end of 2024, there was $2.7 trillion held in reserve in the Social Security “OASDI” Trust Funds[4] and $197 billion held in reserve in the Medicare Part A “HI” Trust Fund.
[1] Section 218 of the Social Security Act permits State governments to opt out of the Federal Social Security program. Twenty-six (26) U.S. States and the District of Columbia have chosen to exempt some or all State or local government employees from paying into the Federal Social Security program.
[2] High earners pay an additional Medicare tax of 0.9% on income above a threshold set by their filing status. The employer is not required to match this additional Medicare tax.
[3] Even employees in States that have opted out of the federal Social Security program and who do not pay the Social Security portion of FICA must, nevertheless, pay the Medicare portion of FICA.
[4] There are two Social Security funds – the OASI (old age & survivor insurance) fund and the “DI” (disability insurance) fund, whose combined 2024 value was $2.7 trillion.