What taxes do employees pay?

By: Jay Parks

A woman holding receipts in one hand with her other hand on her head.

Regarding taxes, most employees only see a portion of the process—the amount deducted from their paycheck. However, understanding what taxes are being paid and why can help you better grasp where your money is going and your obligations. Here's a breakdown of employees' four main taxes: federal income tax, state income tax, Social Security, and Medicare.

Federal income tax

Federal income tax is the most significant tax most employees face. It's calculated on a progressive scale, meaning the more you earn, the higher the percentage you pay. The rate depends on your income bracket and can vary widely based on deductions, credits, and filing status. Regardless of these variables, every employee contributes to the federal government through this tax.

State income tax

For employees in Oklahoma, state income tax is a bit easier to calculate. The state's tax rate maxes out at a relatively low threshold—$25,000. This means most employees hit the highest rate early in their earnings. Like federal income tax, Oklahoma state income tax is withheld from your paycheck and sent to the state on your behalf.

Social Security tax

Social Security is a program most employees will eventually benefit from, and is funded by a tax called FICA (Federal Insurance Contributions Act). For employees, 6.2% of gross pay is automatically withheld for Social Security, which ensures that you're contributing to a system that provides retirement and disability benefits.

Medicare tax

In addition to Social Security, employees contribute to Medicare, which helps fund healthcare for seniors and specific individuals with disabilities. The Medicare tax rate is 1.45% of your gross pay. Like Social Security, this tax is automatically withheld and sent to the federal government.

How self-employment changes the tax equation

While employees see these taxes withheld from their paychecks, self-employed individuals face a different system. They're responsible for paying all taxes directly. In place of FICA (Social Security and Medicare), self-employed individuals pay the Self-Employment Tax (SE tax), which includes both the employee and employer portions of Social Security and Medicare. However, there's some relief: self-employed individuals can deduct a portion of this tax to reduce their taxable income, effectively lowering their overall tax burden by about 20%.

Why it matters

Whether you're an employee or self-employed, you're contributing to the same programs: federal income tax, state income tax, Social Security, and Medicare. The key difference is how these taxes are collected. Employees have taxes withheld at the source, meaning their employer deducts them and sends them to the appropriate agencies. Self-employed individuals must manage these payments themselves.

Understanding these taxes can help you plan better, whether reviewing your paycheck or setting aside money as a freelancer or business owner. Taxes may feel like a burden, but knowing what you owe—and why—can make them more manageable.