What Are the Benefits of Payroll Taxes?

The Internal Revenue Service administers the federal payroll taxes employers and employees must pay; state agencies vary by state and tax. Payroll taxes are used to fund federal and state programs, such as Social Security benefits, hospital insurance and unemployment benefits. In some cases, city and local payroll taxes apply.

Federal Income Tax

The Current Tax Payment Act of 1943 gave the United States government the legal right to impose federal income tax on wage earners via the withholding system. Federal income tax is used to fund national programs, such as law enforcement, interest on national debt, defense, foreign affairs and community development. Employers are required to withhold it from employee paychecks and pay it to the IRS; self-employed individuals make estimated payments to the IRS.

Medicare

The Federal Insurance Contributions Act, or FICA, mandates the collection of Medicare tax, which provides hospital insurance to qualified individuals upon reaching age 65. Part A of Medicare provides hospital insurance for inpatient hospital care and certain follow-up services, Part B funds doctors' services and outpatient care and Part C provides advantage plans that allow individuals in Parts A and B to receive healthcare services through a Part C provider. Part D provides prescription drug coverage.

Social Security

Social Security tax is the old age, survivor and disability insurance portion of FICA. Social Security tax provides benefits to retirees, the disabled, a child or spouse of a Social Security recipient, a child or spouse of a deceased employee, or a dependent parent of a deceased employee. The employer withholds Social Security and Medicare taxes from employees' paychecks and pays it -- plus its own share -- to the IRS. Self-employed individuals pay FICA taxes directly to the IRS.

Unemployment

The Federal Unemployment Tax Act, or FUTA, authorizes the collection of federal unemployment tax. The State Unemployment Tax Act, or SUTA, authorizes the collection of state unemployment tax. Unemployment tax is also called unemployment insurance. The employer alone pays these taxes, which are used together to provide unemployment benefits to qualified employees who have lost their jobs. Unemployment benefits give temporary financial assistance to employees that meet the state's requirements. The employer pays federal unemployment tax to the IRS and state unemployment tax to its state unemployment division.

Considerations

The majority of states require employers to withhold state income tax from employees' paychecks; some city and local governments require withholding. Self-employed individuals receiving income are also required to pay these taxes. State income tax provides funding for state services, such as education, health and human services, transportation, housing, and corrections and rehabilitation services. City and local income tax fund city and local government services. Less commonly, the employer and/or the employee pay state disability insurance, which is used to provide temporary and partial compensation to eligible employees who have lost wages due to maternity or non work-related disability.

References

• Social Security Administration: Understanding The Benefits
• IRS: Understanding Taxes
• U.S. Department of Labor: State Unemployment Insurance Benefits
• Social Security Administration: Temporary Disability Insurance Program Description and Legislative History
• Cato Journal: Evolution of Federal Income Tax Withholding; Charlotte Twight
• IRS: Estimated Tax for 2010