Final answer:
Employers use the W-4 form filled out by employees to determine federal tax withholding amounts for each paycheck, including contributions for Social Security and Medicare. These deductions are part of the payroll taxes that employees and employers split. Independent contractors must pay both portions of these taxes.
Step-by-step explanation:
Understanding Payroll Taxes and Withholding
Employers determine the federal taxes to be taken out of a paycheck using the information provided by employees on their W-4 forms. This form influences how much income tax is withheld each pay period. The withheld amounts are used to pay for federal, state, and local taxes, and this prepayment is reconciled when filing a tax return at the end of the financial year.
Payroll taxes are shared between employer and employee, with 6.2% deducted for Social Security and 1.45% for Medicare from an employee's wages. Employers also contribute a matching amount, although it's often argued that these employer taxes indirectly lower employees' wages. Independent contractors, who typically receive a 1099 tax statement, are responsible for both the employee's and employer's portions of these taxes.
In addition to these social security contributions and Medicare taxes, further deductions might include income tax withholding calculated based on the employee's taxable income and allowances claimed on their W-4 form. This ensures the employee pays their due taxes gradually instead of owing a large sum when taxes are filed.