Final answer:
Withholding taxes deducted from an employee's paycheck cover various taxes and contributions, and are important for both employees and employers in managing yearly tax liabilities. Payroll taxes include both deductions from employees' wages and taxes an employer pays, significantly contributing to federal revenues.
Step-by-step explanation:
Taxes deducted from an employee's paycheck are commonly known as withholding taxes. These taxes typically include federal, state, and local income taxes, as well as contributions to Social Security and Medicare. When beginning a new job, employees often complete a W-4 form, which determines the amount of tax to be withheld from their pay. Payroll taxes also include taxes that employers pay from their own funds, which are used to fund social security and other insurance programs. If employees do not have enough tax withheld, they may face a tax liability at the end of the year.
In addition to individual taxes, businesses pay their own set of taxes which may include income tax, employment tax, and excise tax. Payroll taxes are significant, as they make up over 80% of federal revenues, mainly funding government programs like Social Security and Medicare. Therefore, correctly managing payroll taxes is crucial for both employees and employers.