Final answer:
Payroll taxes are composed of Social Security taxes and Medicare taxes. The costs are shared by both employer and employee and while each contributes a certain percentage, the full impact may indirectly affect the employee's overall compensation.
Step-by-step explanation:
Payroll taxes are made up of Social Security taxes and Medicare taxes, which makes option A the correct choice. Payroll taxes consist of deductions from an employee's wages, as well as taxes paid by the employer based on the employee's wages. These taxes provide funds for significant social programs.
Employees typically see 6.2% of their paycheck deducted for Social Security and 1.45% for Medicare. While both the employer and the employee are responsible for these payroll taxes, it's often discussed that the employer's contributions may effectively come out of the employees' potential earnings, meaning that employees might indirectly pay for these as well through lower wages.
The Medicare payroll tax is considered a proportional tax, which is a flat percentage of all wages. Conversely, the Social Security payroll tax is proportional up to a specific wage limit and becomes regressive for earnings above that limit, suggesting individuals with higher incomes pay a smaller percentage of their income in these taxes.