Correct Response: A. Payroll taxes and federal and state income taxes are based on an employee's wages. Payroll taxes are paid by both the employer and the employee. Federal payroll taxes include Social Security, Medicare, and unemployment insurance. Some state payroll taxes include unemployment insurance tax. Response B is incorrect because both payroll taxes and federal and state income taxes are withheld by the employer. Payroll taxes are paid by all employees regardless of how much they earn. However, Social Security is capped at an upper income level ($118,500 in 2015), so people who earn above this amount pay a smaller social security tax rate than people who earn below this amount (C). Response (D) is incorrect because self-employed individuals also pay payroll taxes.
