You've probably got a dizzying array of taxes being taken out of your paycheck every week or month. A few of these taxes are mandated by the federal government. Unless they are exempt, all employees must pay federal income tax, Social Security tax and Medicare tax.
Federal Income Tax
Federal income tax is levied on personal income. It provides for national programs such as interest on national debt, law enforcement, defense and foreign affairs. Your employer is supposed to give you a W-4 form to complete when it hires you. The form helps your employer to figure the amount of federal income tax to take out of your wages. You put your filing status and allowances on the form. Your employer uses the W-4 data and the Internal Revenue Service Circular E tax-withholding tables to figure your tax amount.
Social Security Tax
Social Security tax is a payroll tax, which the Federal Insurance Contributions Act authorizes. The tax provides benefits for retirees and their dependents and the disabled and their dependents. Your employer withholds Social Security tax at the rate Congress sets each year, up to the annual wage limit. As of 2012, Social Security is taxed at 10.4 percent; since your employer pays 6.2 percent, you pay only 4.2 percent. As of 2012, the annual wage limit for this tax is $110,100. In a few states, state and local employees do not pay Social Security taxes.
FICA also authorizes the collection of the Medicare payroll tax, which provides hospital insurance and medical benefits for eligible individuals when they reach 65. Congress sets the tax rate each year, and as of 2012, Medicare is taxed at 2.9 percent; your employer pays half of that amount, so you pay only 1.45 percent. No annual wage limit applies to this tax.
Whereas Congress establishes federal tax laws, the IRS administers federal income tax and collects Social Security and Medicare taxes. The Social Security Administration administers Social Security and Medicare taxes to some extent, which enables the agency to pay benefits to those who qualify for Social Security and Medicare.
If you work for a railroad company, your employer must withhold railroad retirement taxes from your paychecks. Tier 1 tax is equivalent to the Social Security tax and Medicare tax, which non-railroad employees pay. An additional tax, called Tier 11, also applies; this tax has a separate withholding rate and annual wage base.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.