The Uses of Payroll Tax

FICA, the Federal Insurance Contributions Act, mandates that all employed citizens and their employers, contribute to these taxes throughout the year. FICA is expected to be withheld from every paycheck. The FICA tax is determined using a payroll tax withholding based on Social Security and Medicare tax estimates which are determined based on an employees salary. Employers withhold federal income taxes and state income tax as well, if they apply.

Some states do not impose state income taxes on employees. In order for employers to calculate payroll taxes, a number of taxes are estimated and then subsequently withheld from each paycheck. Independent contractors are responsible for setting aside money to pay their taxes at the end of the year, as employers are not required to take part in payroll tax withholding for independent contractors.

Employers that do not calculate payroll taxes and take part in payroll tax withholding for applicable employees, can incur financial penalties from the IRS. That penalty can be one hundred percent of each employees tax responsibility plus interest due.

The United States government holds each employer and their employees responsible for payroll tax withholding. Employers calculate payroll taxes in order to estimate as closely as possible, each employees tax burden. The government is allowed to make determinations as to the spending of tax revenue, as long as it is utilized to run the country. In fact, taxpayers have no say as to the manner in which tax dollars are spent, except within state and local municipalities.

NEXT: Understanding the Purpose of Payroll Taxes