Payroll Tax Deductions
Payroll tax deductions are levied on nearly all working people in the United States. Known as the Federal Insurance Contributions Act, this law provides for part of the income to fund certain federal programs. The deductions either come directly out of a person's paycheck or are paid to the IRS when filing a tax return. The law is codified in the United States Code Title 26, Subtitle C, Chapter 21.
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Function
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The FICA tax is imposed for the purpose of funding entitlement programs such as Social Security and Medicare. Both of these programs are guaranteed by mandate to every American citizen and are partially based on the amount of taxes an individual pays in over the course his life.
Features
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Both self-employed individuals and those working as wage earners are subject to payroll taxation. The tax is divided into two sections: Social Security and Medicare. The Social Security tax rate is 12.4 percent of a person's wage, while Medicare is 2.9 percent. However, half the cost is covered by employers in the case of wage earners.
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Considerations
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According to the Center on Budget and Policy Priorities, nearly three-fourths of all American taxpayers pay more in payroll taxes than any other form of government levied tax law, such as income taxes. This is because the federal budget is substantially impacted by the costs of the programs covered by these taxes.
Misconceptions
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Unlike other taxes, payroll taxes are a form of regressive taxation. This means that as one's income continues to rise, the taxes paid towards FICA lower. As of 2008, only the first $102,000 of income is taxed.
Significance
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Payroll taxes are imposed only on income from labor. Investments into financial securities such as stocks and bonds which pay out interest and dividends are not taxed according to the FICA laws.
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Resources
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