Definition
Taxes on wages that fund Social Security and Medicare, collected through FICA: employees and employers each pay half, and self-employed people pay both halves as self-employment tax. They apply from the first dollar of wages, separately from federal income tax.
Why it matters
Payroll taxes are why even a paycheck too small to owe income tax still shrinks, and why self-employment income carries a heavier tax load than the same wages. They also build the earnings record that Social Security benefits are later calculated from.
Example
On a $1,000 paycheck, $76.50 leaves as the employee's share of Social Security and Medicare while the employer quietly pays a matching $76.50. A freelancer invoicing the same $1,000 owes both halves personally, which is why they set aside more of each payment for taxes.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.