Payroll taxes fund Social Security and Medicare. They are separate from income tax, applied to different bases, and paid by both employer and employee. The Scholar should understand the wage base, the split, and how self-employment tax combines both halves.
- 01State the current Social Security wage base and the Medicare rate.
- 02Distinguish the employer's and the employee's shares.
- 03Explain the additional Medicare surtax at high incomes.
The two taxes
Social Security: 12.4% on wages up to the annual wage base (~$168,000 in recent years, indexed). Split 6.2%/6.2% between employer and employee. Medicare: 2.9% on all wages with no cap. Split 1.45%/1.45%. Self-employed pay both halves — 15.3% total — as self-employment tax.
The wage base
The Social Security portion stops at the wage base. Wages above that number are taxed only at 2.9% Medicare, meaning the marginal payroll tax drops sharply once the wage base is exceeded. High earners plan around this transition.
The surtax
An additional 0.9% Medicare surtax applies to wages above $200,000 (single) or $250,000 (married). It is paid by the employee only. A 3.8% Net Investment Income Tax at similar thresholds applies to investment income. Together they add materially to the effective rate at high income.
- Social Security stops at the wage base; Medicare does not.
- Self-employed pay both halves.
- Additional Medicare and NIIT surtaxes apply at high income.