With each payroll, you and your employees have to pay taxes. You collect and remit the money, but what are payroll taxes used for? How does the government use the money? Staying informed on where your money is going is important.
What is the purpose of payroll taxes?
Your remitted Social Security tax is sent to the Social Security Trust Funds. Social Security taxes fund benefits for individuals who are disabled, retired, or are children of deceased workers. Medicare taxes are applied to the Hospital Insurance Trust Fund. This trust fund helps pay for Medicare Part A and the administration of the Medicare Program.
What are payroll taxes used for?
Federal payroll taxes in the U.S. cover the Medicare and Social Security contributions. As an employer, you withhold 7.65% of your employees’ wages per paycheck, and you match 7.65% of each employee’s wages. You must also withhold federal income taxes which the U.S. Treasury then disburses to government agencies.
A variety of payroll taxes impact the amount of your employees’ net pay, but what do payroll taxes fund? Use the sections below to discover where payroll taxes go.
Federal income tax
You only withhold federal income taxes from employee wages. Your business does not pay federal income tax. You determine how much to withhold based on income tax tables, each employee’s earnings, and withholding allowances claimed on the Form W-4 personal allowances worksheet.
Federal income taxes go to the U.S. Treasury General Fund. The Treasury then disburses money to government agencies based on the federal budget.
The White House has an Online Tax Receipt that shows what percentage of income tax goes to each federal program or service. You can even enter the amount of income tax that you paid to see how much money went to each program.
The federal income taxes withheld from employee wages are credited to each employee when they file Form 1040.
State income tax
Many states have a state income tax. Only employees pay state income tax.
States use the income tax to fund state programs, such as education, corrections, and public assistance. State income taxes are disbursed based on each state’s budget.
Social Security tax
Social Security tax is paid by both you and your employees. You will withhold Social Security tax from employee wages, and you will pay a matching amount.
The Social Security tax you remit is sent to the Social Security Trust Funds. Social Security tax funds benefits for people who are retired, disabled, or are children of deceased workers.
Both the tax withheld from employee wages and the amount you contribute are credited toward your employees.
Both you and your employees pay Medicare tax. Like Social Security tax, you withhold Medicare tax from each employees’ wages, and you also pay a matching amount.
Medicare taxes are put into the Hospital Insurance Trust Fund. The fund helps pay for Medicare Part A and Medicare Program administration.
The tax is credited toward employees for both the employee and employer portions.
Only you will pay FUTA tax. You will not withhold any employee wages for FUTA.
FUTA tax is placed into three federal accounts. The Employment Security Administration Account supports the administration of state unemployment insurance programs. The Extended Unemployment Compensation Account provides funds for the extended benefits programs. The Federal Unemployment Account provides loans for distressed state unemployment programs.
Like FUTA tax, only you will pay SUTA tax. SUTA tax does not come out of employee wages. Each state sets its own SUTA rates. You will pay SUTA to your state agency that handles the tax.
SUTA taxes fund state unemployment benefits for displaced workers.
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