Payroll Taxes

Payroll taxes are taxes paid by both employers and employees based on salaries, wages, tips, and bonuses paid by employers on their employee’s behalf to the federal and state government. Employers pay their portion of payroll taxes for each of their employees directly to the Internal Revenue Service, the IRS. Employees pay payroll taxes as a deduction from their pay, noted on their pay stub. These taxes include FICA deductions which are Social Security and Medicare contributions, Federal Income tax and federal unemployment taxes.

FICA (Federal Income Contributions Act) deductions are employee deductions contributing directly to fund Social Security and Medicare. The employer is required to match the contributions to Social Security and Medicare to equal the employee FICA withholding, thereby, both employee and employer making their contributions to Social Security and Medicare sharing the tax liability. The Social Security fund was established in 1935 as a means to provide retirement savings for American wage earners. Its primary goal was to fund Social Security, however, additional funds are siphoned off to contribute to Medicare, as well. Social security contributions or Social Security taxes are capped at $142,800 in earnings. If employee earnings are above that amount, then taxes are not required to be deducted from the payroll for Social Security. With the Medicare portion of FICA contributions, there is no wage cap and will be deducted or taxed from the worker from their life-long earnings. Payouts to wage-earners for Social Security benefits are set at a designated year for maximum distribution. However, distributions can begin as early as 62 years of age, but the recipient will be penalized for early distributions in the form of overall reduced benefits. Paying FICA taxes also allows for an insurance benefit. If you become disabled and have been paying FICA taxes, then you may be eligible for disability benefits and meet expected requirements. Upon death, if a surviving spouse is 60 years old or when they turn 60, they will be allowed to begin taking their spouse’s Social Security distributions. In addition, if the surviving spouse is under 60 years old and takes care of minor children, then they will be able to receive the deceased spouse’s Social Security benefits. This also applies to children under 18 years old or able to prove they are a student. The maximum age to receive a parent’s Social Security benefit is 24 years old. This process does not apply to the Medicare portion of the FICA deductions.

Federal Income payroll deductions or Federal income taxes contribute to a general government fund through the U.S. Treasury. In most cases, the employee will have these contributions deducted from earned income in the form of wages, salaries, tips, and bonuses. Federal unemployment compensation is also subject to federal income tax. The contributions, or taxes, are deposited into a general government fund of the U.S. Treasury. This federal income tax to the federal government is the government’s largest source of revenue. Federal income taxes are subject to a determined rate based on the wage earners’ income. For example, higher incomes are taxed at a higher percentage than those that earn less income. Moreover, if the income does not reach a minimum amount set by the government, then little to no federal income tax is imposed or deducted from their payroll. In addition to federal income taxes, the state may impose state income taxes also deducted from each payroll and as with federal income taxes, will be contributed into a general state fund.

The Federal Unemployment Tax was created in 1939 as a payroll tax on businesses with employees. Unemployment Tax is a direct contribution from the employer and mandated by the IRS to explicitly not deduct from the employee. These funds are used to give aid to state agencies to allocate benefits or pay to those who are unemployed. In other words, unemployment insurance. Under provisions of the Federal Unemployment Act, employers must pay with a choice of quarterly or annually based on employee wages.

For the wage earners and businesses, payroll taxes are mandatory revenues collected by governments on the federal and state levels on behalf of government programs. These taxes will be imposed on all wages, tips, and salaries as long as employees receive pay benefits and employers have tax responsibilities for as long as businesses have employees and are considered tax liabilities for both employees and employers.