If you are about to start a new business, organization or company, you should definitely have an idea about payroll tax, how to do calculations and why they are important in the USA. Payroll taxes are a major source of tax revenue for state and federal governments, generating funds for unemployment and welfare checks.
Pay roll tax is the Federal and state taxes that an employee is required to deduct and pay to the government on behalf of employees. These include state and federal income taxes, social securities and Medicare taxes that are withheld from the wages of an employee. The employer has to contribute to these taxes, the same amount that is deducted from the employees. Payroll tax also includes the state and federal unemployment taxes paid by a company to the government; this means employers have to pay the State and Federal unemployment tax.
In the United States, payroll taxes pay for two insurance systems namely Social Security and Medicare. Social security that comes under payroll tax includes insurance policies for retirement, disability, hospital, workers' compensation and many more. Medicare is the insurance policy that covers elderly people, mostly above 65 years of age. Being a regressive tax, it is much more expensive that income taxes. Like any regressive tax, the payroll tax takes a large proportion of income from those who draw low incomes.
The important feature of payroll tax is that it requires the employer to contribute. For example, if 7 percentage of an employee's income is withheld for social security, the same amount has to be put in by the employer for the payroll tax. This means that self-employed people will have to bear the burden of the entire tax. These are calculated and deducted according to state and Federal tax structures.