What Are Payroll Taxes?

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What Are Payroll Taxes?

Payroll taxes include federal, state, and local income taxes, federal and state unemployment taxes, and Medicare and Social Security taxes. They are automatically taken out of your paycheck every time you are paid, based on a flat, fixed tax rate for state and local income taxes and Medicare and Social Security taxes. For federal income taxes, the rate depends on your tax filing status and the number of withholding allowances you designate when you fill out federal tax withholding forms.

What are they used for?

Some taxes are used to fund a broad array of programs. Federal, state, and local taxes fund government programs such as road construction, emergency disaster relief, enforcement of safety, and environmental regulations and health care. Other taxes are specifically designated to fund certain programs. This applies to the Social Security and Medicare taxes, which fund Social Security benefits and Medicare health care programs for the elderly.

Who pays them?

Both employers and employees pay payroll taxes. Employers pay the taxes that fund unemployment insurance payments on both the federal and state levels. These programs are known as FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) for the legislation that authorizes the collection of unemployment taxes. Employees do not contribute to FUTA and SUTA. Both employees and employers pay Social Security and Medicare taxes, with each paying half the tax due. Employees pay federal, state, and local income taxes; employers do not pay personal income tax, but do pay corporate income tax. The FUTA tax rate is 6.2 percent, but employers can receive a credit of up to 5.4 percent for SUTA taxes paid.