Payroll taxes, also known as EMPLOYMENT taxes, are levied on wages and salaries and are assessed on both employers and employees. Payroll taxes are collected by state governments and the federal government. Employers are required to withhold state and federal income taxes as well as SOCIAL SECURITY and Medicare taxes from employees’ salaries, paying these taxes on the employees’ behalf as well as paying a matching amount of Social Security and Medicare taxes. Employers also pay 100 percent of state and federal UNEMPLOYMENT taxes and WORKERS’ COMPENSATION taxes. These social INSURANCE programs provide cash payments to help replace INCOME lost as a result of retirement, unemployment, disability, or death, and are financed by required contributions from both employers and employees. Employment taxes imposed by the federal government are FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. FICA governs taxes for Old Age Insurance and Survivor’s and Disability Insurance (OASDI, aka Social Security) and hospital insurance (Medicare). These taxes are paid by both the employer (7.65 percent of wages in 2002) and the employee (7.65 percent of wages). A self-employed person pays a tax of 15.3 percent of earnings (7.65 percent + 7.65 percent) under the Self-Employment Contributions Act (SECA). FUTA taxes pay for unemployment insurance coverage. An employee, if laid off without cause, may apply for unemployment compensation. FUTA taxes are 6.2 percent of an employee’s first $7,000 of wages and are paid solely by the employer. State Unemployment Taxes (SUTA) are levied by the state where the EMPLOYMENT occurred and are calculated as a varying percentage of wages, depending on the number of unemployment claims that have been filed by employees terminated by the employer. A credit is provided in the calculation of FUTA for the SUTA taxes paid, up to 5.4 percent. This results in a minimum net-FUTA tax rate of 0.8 percent. Self-employed individuals are not covered under the FUTA system and thus do not pay FUTA taxes on their earnings. The OASDI contributions finance the Social Security system. During their working lives, members of the system and their employers make contributions via payroll taxes. Employees’ share of the tax is withheld from their paychecks. Upon retirement, members are eligible for payments based in part on their contributions. Social Security also provides benefits for disabled workers and for dependents and survivors of disabled and retired individuals. Medicare provides health-care coverage for individuals aged 65 and older. In addition to FICA tax withholding on employee’s wages, an employer is required to withhold federal and state income taxes from employees’ paychecks. Each new employee must complete an IRS form W-4, which provides information concerning his or her marital status and the number of dependents he/she is allowed to claim. A new W-4 can be used whenever there are changes to an employee’s filing status and/or number of dependents. The federal and state withholding will be based on withholding tables provided by the INTERNAL REVENUE SERVICE (IRS) and each state. Information on federal payroll-tax requirements can be found in IRS Publication 15, Circular E. Information on state payroll taxes can be found in each state’s taxation and revenue department. FICA taxes are reported on an IRS form 941, submitted quarterly. However, FICA and federal income-tax withholding payments must be remitted during the pay period as payroll checks are issued. The deposit schedule is dependent on the dollar amount of the deposit and/or the day of the week the payday occurs. Most employers use the Electronic Federal Tax Payment System to make deposits to an authorized financial institution. FUTA taxes are reported on IRS form 940. Social Security (OASDI) is the largest domestic-spending program. It provides retirement incomes and minimum incomes for the aged (SUPPLEMENTAL SECURITY INCOME [SSI]). Social Security benefits are calculated in two steps. Average indexed monthly earnings (AIME) are derived from the worker’s earnings history and determine the primary insurance amount (PIA). To compute actual benefits, the PIA is adjusted according to retirement age, family status, and other earnings. Benefits are paid not out of a fund of previous contributions but out of current payroll taxes. This pay-as-you-go financing transfers income from younger to older citizens. SSI adds to the transfer aspect by including an income guarantee. There have been calls to reform the Social Security system, both to reduce its impact on SAVING and work incentives and to insure its solvency. Fundamental reforms under consideration would separate the forced savingsand- transfer aspects of the program. Linda Bradley