Payroll tax refers to a tax that an employer withholds from employees' wages and pays on behalf of their employees. It consists of various taxes imposed on employers and employees in relation to their earnings. The most common components of payroll taxes include:
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Social Security Tax: A federal tax that funds the Social Security program, which provides benefits for retirees, disabled individuals, and survivors of deceased workers. This tax rate is typically matched by employers.
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Medicare Tax: A federal tax that funds Medicare, a program that provides health insurance for individuals aged 65 and older, as well as some younger people with disabilities. Like the Social Security tax, this tax is also matched by employers.
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Federal Unemployment Tax Act (FUTA): A federal tax imposed on employers to fund unemployment insurance. Employees do not pay this tax; it's solely the responsibility of employers.
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State Unemployment Tax: Similar to FUTA, but imposed by individual states to fund state unemployment insurance programs.
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Other Local Taxes: Some local jurisdictions may impose additional payroll taxes for specific purposes, such as funding local services or programs.
Payroll taxes are typically calculated as a percentage of the employee's taxable wages and can vary based on federal, state, and local laws. It's important for employers to accurately withhold and remit these taxes to the appropriate governmental agencies.