Payroll Taxes and Federal Income Tax Withholding

By | January 18, 2016

Employers withhold payroll taxes and income tax from employees’ pay. Employers send the amounts withheld to the federal government. Employees complete Form W-4. Employers use Form W-4 to determine how much income tax to withhold from employee pay. The Social Security tax is also called the FICA (Federal Insurance Contributions Act) tax.


Social Security tax provides the following benefits for employees and their dependents:

  • Retirement benefits
  • Benefits for the dependents of retired workers
  • Benefits for the disabled and their dependents
  • The Medicare tax is used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of both are eligible to receive Medicare benefits upon reaching age 65.


Federal income taxes finance:

  • National defense, veterans, and foreign affairs
  • Social programs
  • Physical, human, and community development
  • Law enforcement
  • Interest on the national debt

Employers withhold taxes from employees’ pay.

  • Gross pay is the amount the employee earns.
  • Net pay, or take-home pay, is the amount the employee receives after deductions.


The difference between gross pay and net pay is:

  • Social Security taxes
  • Medicare taxes
  • income tax withheld
  • other amounts withheld

Employers send the withheld taxes to the federal government.

What are Payroll Taxes?

Payroll Tax Rates
Social Security tax rate 6.20%
Medicare tax rate 1.45%
Total payroll taxes 7.65%


If an employee earns $1,000, the payroll taxes are:

Social Security tax $62.00
Medicare tax $14.50
Total payroll taxes $76.50

The employer deducts $76.50 from employee’s pay and it will be sent to the federal government. There is a maximum annual amount of Social Security tax withheld per employee. Social Security taxes are not withheld on amounts over the earnings limit. For 2014, the earnings limit was $117,000, and the maximum Social Security tax was $7,254 ($117,000 x 6.2%). There is no limit on the amount of wages subject to Medicare tax.

Employees complete Form W-4, Employee’s Withholding Allowance Certificate to determine how much federal income tax to withhold.


The amount of federal income tax withholding depends on

  • the employee’s marital status,
  • the number of withholding allowances claimed by the employee,
  • any additional amount the employee wants to withhold, and
  • any exemptions from withholding that the employee claims.


Reviewing Form W-4

Review Form W-4 for Alicia Myers. Notice that Alicia is single and claims one withholding allowance.

An employee earns $2,000 a month as a physical therapist’s assistant. In addition to payroll taxes and income tax withholding, her employer withholds $50 for her retirement account. Angela’s net pay is calculated as follows:

Gross pay $2,000.00
Social Security tax (6.2 percent of gross pay) -$124.00
Medicare tax (1.45 percent of gross pay) -$29.00
Income tax (per Form W-4) -$237.00
Retirement -$50.00
Net pay $1,560.00

Angela earns $2,000 gross pay and receives a net paycheck for $1,560.

Her employer sends $390 ($124 + $29 + $237) to the federal government and $50 to the retirement fund.