I’m seeing a lot of political discussion about payroll taxes recently. What exactly are payroll taxes, what do they fund and who pays them?
I’ve done an amount of research on this already, but it just isn’t sticking for me. What’s the difference between what the employer pays and what the employee pays?
In: Economics
In the United States, the two main federal payroll taxes are FICA and Medicare. FICA stands for Federal Insurance Contributions Act which was passed in the 1930’s. This is the money that goes in to the Social Security system. Social Security provides cash payouts to retirees, their surviving spouses and to minor children of adults who are deceased. Think of it as a nationalized pension plan.
Medicare goes into the Medicare program which is a form of nationalized health care that persons over 65 participate in.
The FICA Tax is a tax of 12.6% on the first $137,700 of wages paid to an employee during the year. The tax is split 50/50 between the employer and employee.
The Medicare tax is a tax of 2.9% on all wages, no mater how much. It is also split 50/50.
In addition there are federal and state Unemployment taxes. Here, employers (and employees too in some states) pay into state unemployment funds. When people get laid off they collect unemployment benefits which are paid out from these state funds that all employers pay in to.
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