What the Payroll Tax Increase Means for You

Payroll taxes are mandatory contributions deducted from an employee’s earnings and matched by their employer. These funds are remitted to the government to finance federal programs. Federal law allows for periodic adjustments to tax rates and the amount of income subject to them, which can affect financial planning for individuals and businesses.

Components of Federal Payroll Taxes

Federal payroll taxes are governed by the Federal Insurance Contributions Act (FICA), which consists of two taxes. The first is the Social Security tax, labeled on pay stubs as “OASDI” for old-age, survivors, and disability insurance, which funds benefits administered by the Social Security Administration. The second component is the Medicare tax, which funds the hospital insurance program for individuals aged 65 or older and certain younger people with disabilities.

Responsibility for FICA taxes is shared equally between an employee and their employer. The Social Security tax rate is 6.2% for both the employee and employer. The Medicare tax rate is 1.45% for both parties. In total, 7.65% is withheld from an employee’s check, and the employer contributes a matching 7.65%.

High-earning employees are also subject to an Additional Medicare Tax of 0.9% on wages exceeding certain thresholds, such as $200,000 for single filers. Employers begin withholding this tax once an employee’s wages surpass $200,000 in a calendar year. Unlike the standard Medicare tax, there is no employer match for this additional amount.

Understanding the Payroll Tax Increase

An increase in payroll taxes for many workers is not due to a change in tax rates, but rather the annual adjustment of the Social Security wage base limit. This limit is the maximum amount of earnings subject to Social Security tax in a given year. For 2025, the wage base limit is $176,100.

Once an employee’s earnings exceed this threshold, they and their employer stop paying the 6.2% Social Security tax on earnings for the rest of the year. The Social Security Administration adjusts the limit annually to account for changes in the national average wage index. As national wages rise, the wage base limit increases, subjecting more income to the tax for high earners.

In contrast, the 1.45% Medicare tax has no wage base limit and applies to all of an employee’s covered wages. This structural difference is why the adjustment to the Social Security wage base drives payroll tax increases for those with incomes above the previous year’s limit of $168,600.

This effective tax increase is targeted at individuals whose earnings fall between the old and new limits. For workers earning less than the previous limit, an adjustment to the wage base has no direct impact on their total tax liability. The increase is felt by those whose income surpasses the prior year’s cap.

Impact on Employee Take-Home Pay

The annual increase in the Social Security wage base limit reduces the take-home pay for employees earning above the new threshold. The 6.2% Social Security tax is withheld for more pay periods until their cumulative earnings reach the new limit. Once the threshold is surpassed, the withholding stops, and their net pay increases for the rest of the year. This cycle repeats with each annual adjustment to the wage base.

Consider an employee earning $180,000 annually. In 2024, with a wage base limit of $168,600, they paid a maximum Social Security tax of $10,453.20. In 2025, the limit rises to $176,100, so that same employee will pay $10,918.20 in Social Security taxes. This is an increase of $465 in their annual tax obligation, resulting in lower take-home pay until the new cap is reached.

Employer Responsibilities and Costs

A business’s payroll tax obligations include paying a matching share of FICA taxes, which is a direct operating expense. For every dollar of Social Security and Medicare tax paid by an employee, the employer must contribute an equal amount from company funds.

When the Social Security wage base limit increases, an employer’s payroll costs also rise for each employee earning above the previous year’s limit. For an employee earning $180,000, the employer’s matching contribution for Social Security increases by $465 in 2025. This additional cost must be factored into a business’s budget and financial forecasts.

Employers are also solely responsible for the Federal Unemployment Tax Act (FUTA) tax, which funds federal unemployment programs. The FUTA tax rate is effectively 0.6% on the first $7,000 of an employee’s wages, for a maximum of $42 per employee. This tax adds to the payroll tax burden for businesses, along with state unemployment taxes.