Understanding the Purpose of Payroll Taxes

Payroll taxes

FICA, the Federal Insurance Contributions Act, is an employment tax enacted on all employees and employers that conduct business in the United States. These taxes cover funds for Social Security and Medicare.

The deductions determined using a payroll tax calculator allow for coverage of unemployment benefits and disability benefits. Employer payroll taxes are usually broken down so that employees can see where there deductions are going. Some states do not require employers to give a pay stub to employees, but that information is available at the end of the year through a variety of tax forms provided by employers.

The payroll tax calculator utilized by employers allows employees to see how much they have contributed to Social Security. In fact, all taxpayers receive a form from the government that shows what their lifetime contributions to Social Security have been. That tax contribution is directly correlated with the amount an employee can expect to receive through Social Security upon retirement or disability. A taxpayer can see exactly where they stand financially for retirement, by analyzing their payroll tax calculator estimates for each year.

Employer payroll taxes are utilized to cover many governmental expenses. Many of those expenses are directly related to employees, such as Social Security. However, the government has discretion with other types of taxes. Congress is allowed to utilize tax revenue to fund a variety of programs. For example, income taxes are used in any way that Congress sees fit. The only requirement is that tax revenue be spent for the good of the public. Whereas


FICA taxes are utilized to directly benefit the employee. An employee may utilize their Social Security payments when they retire or should they become disabled. In addition, FICA helps to fund unemployment insurance and Medicare. Employer payroll taxes allow employees and employers to plan for their financial future.

NEXT: History of the Federal Insurance Contributions Act