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The term Payroll tax actually includes the Social Security tax, Medicare tax and Federal income tax. The Social Security tax provides benefits for retired workers, the disabled their dependents and it has a payroll tax rate of 6.2%. There is a maximum annual amount of Social Security tax withheld per employee. Social Security taxes are not withheld on amounts over the earnings limit. In 2004, the earnings limit was $87,900, and the maximum Social Security tax was $5,449.80.

The Medicare tax provides medical benefits for certain individuals when they reach age 65 and has a payroll tax rate of 1.45%.

Federal income tax is used to fund national programs such as defense, community development, and law enforcement. All employees must complete Form W-4, the Employee's Withholding Allowance Certificate, which is used by employers' payroll tax departments to determine how much federal income tax to withhold from the employee's paycheck. There are a number of online payroll tax calculators that employees can use to check if they are having the right amount of money withheld. This is just as important to see if too little payroll tax is being withheld as too much payroll tax to make sure that you don't have any nasty surprises when you file your tax return because you actually owe more tax than was withheld.

The amount of payroll tax that is withheld from an employee is sent to the federal government. If the payroll taxes are withheld, but not paid to the government, the employee is covered. The IRS will go after the employer but it is important to keep your check stubs as documentation of the withholding in case you get an incorrect W-2 Form. A W-2 form is the document which you will receive at the beginning of February or March that indicates the total amount of money you have earned and which portion was withheld for as payroll tax.

The whole issue of payroll tax may seem very confusing; especially to a first-time employer but there are plenty of books that can help to clarify the procedures involved. There are also a number of websites that can offer advice on all aspects of payroll tax from an employee's perspective as well as an employer's. In fact, there are very few gray areas when it comes to payroll tax and the procedures, processes and deadlines are extremely well set out and documented thoroughly by a variety of sources.