Final answer:
The federal payroll tax system levies a 12.4% Social Security tax on income up to a cap (which was $137,700 in 2020) and a fixed 2.9% Medicare tax without a wage limit. The Social Security wage cap is indexed annually for inflation.
Step-by-step explanation:
The question concerns the structure of payroll taxes that fund the United States Social Security and Medicare programs. Unlike the federal income tax, where tax rates increase as income rises, Social Security tax is capped. In 2020, this cap was set at a wage limit of $137,700.
This means that only income up to this threshold is subject to the 12.4% Social Security tax. Contributions for Medicare are different, as they do not have a wage cap and are taxed at a fixed rate of 2.9%. The government annually adjusts the Social Security tax cap to account for inflation, a process known as indexing, which has been in place since the Social Security Indexing Act of 1972.