Breaking down payroll taxes

Ever wondered where the money taken out of your paycheck is going? Here are the basics of payroll taxes.

Video Transcript

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- Ever wonder what all those taxes out of your paycheck are for? The government takes a certain percentage of your wages to fund various programs that Americans can take advantage of. Payroll taxes include federal, state and local income taxes, federal and state unemployment taxes, and Medicare and Social Security taxes. Both employers and employees pay payroll taxes. They're automatically taken out of every paycheck based on a flat fixed rate.

For federal income taxes, the rate depends on your tax filing status and the number of withholding allowances you designate when you fill out a federal tax withholding form. Some taxes are used to fund a broad array of government programs, like road construction, emergency disaster relief, safety, health care, and environmental regulations. Federal tax rates depend on your filing status. The most favorable tax status is married filing jointly or qualifying widow or widower.

When determining payroll taxes for federal income taxes, employers use tax tables provided by the IRS. States that levy an income tax may set a flat rate or rates based on the amount of income you earn, as do local governments that levy an income tax. For both local and state income taxes, you generally pay tax on your compensation income based on the state and locality where you work, rather than where you live.

If you or your employer fails to have sufficient funds withheld from your paycheck, the IRS can hold you personally liable for the shortfall. You must also pay taxes on any bonuses, non-cash gifts and benefits, such as life insurance, that are subject to federal tax. Stay financially fit, friends.