Employment Taxes

The Social Security and Medicare taxes, part of the Federal Insurance Contributions Act (FICA), originated to address economic and social needs in the United States. The Social Security Act of 1935 was a response to widespread economic hardship during the Great Depression (1929–1939). Millions of Americans, particularly the elderly, faced poverty due to unemployment, lack of pensions, and no safety net. In 1932, over 50% of Americans over 65 had no regular income, and private pensions covered less than 5% of workers.

The Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) are examples of applying wage and employment taxes indirectly. Employers and employees lack discretion over the tax withheld from employment wages; and these costs are passed on to consumers through higher prices. The tax burden is distributed across the economy.

Wage and payroll taxes, indirectly collected from the source, is within the complete or plenary taxing power of Congress limited by 16th Amendment and Article I, Section 8 of the Constitution. These types of taxes are not direct taxes, but rather indirect taxes on the income generated from labor and capital. ¹, ², ³ The Federal Unemployment Tax Act (FUTA) is an excise tax on the employer, not the employee.

In Steward Machine Co. v. Davis, ante, p. 301 U. S. 548. P. 301 U. S. 645. the Supreme Court

upheld the validity of Title IX of the act, imposing an excise upon employers of eight or more. In this case, Titles VIII and II are the subject of attack. Title VIII lays another excise upon employers in addition to the one imposed by Title IX (though with different exemptions). It lays a special income tax upon employees to be deducted from their wages and paid by the employers. Title II provides for the payment of Old Age Benefits, and supplies the motive and occasion, in the view of the assailants of the statute, for the levy of the taxes imposed by Title VIII. The plan of the two titles will now be summarized more fully. Title VIII, as we have said, lays two different types of tax, an "income tax on employees" and "an excise tax on employers." The income tax on employees is measured by wages paid during the calendar year. § 801. The excise tax on the employer is to be paid "with respect to having individuals in his employ," and, like the tax on employees, is measured by wages. § 804. "The tax upon employers is a valid excise or duty upon the relation of employment." Helvering v. Davis, 301 U.S. 619 (1937)

Wage and payroll taxes, when imposed on the payment of wages and salaries and collected by the employer, function as indirect taxes. However, once wages are paid to the employee after deducting these taxes, the remaining amount becomes the employee's property and it would appear that any subsequent tax on possessed property is no longer an indirect tax, but a direct tax on property. Such a direct tax must be collected by the rule of apportionment; otherwise, it ceases to be an indirect tax and operates as a direct tax on property.

Employers are the "source" of the income being taxed; any withholdings which includes taxes, come from the employer's pocket first. Employers generally cover all costs associated with employing labor, and most importantly, have the ability to add these costs into any product or service rendered.

Withholding

The Civil War income tax was recognized as an indirect tax “under the head of excises, duties and imposts.” Brushaber, 240 U. S., at 15; see also Springer v. United States, 102 U.S. 586, 598, 602 (1881). This tax had a provision for withholding the tax before payment of wages and salaries.

The Social Security Act of 1935 created the Social Security program and imposed a payroll tax to be paid by employers and employees. The Federal Insurance Contributions Act (FICA) (codified in the Internal Revenue Code) imposes a Social Security withholding tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base. The same 6.20% tax is imposed on employers.

A separate payroll tax of 1.45% of an employee's income is paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding a total tax rate of 2.90%

The US has the highest payroll withholding rates of any Nation ⁴

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Footnotes

1. Eisner v. Macomber, 252 U.S. 189 (1920): 'In order, therefore, that the clauses cited from Article I of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not 'income', as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.

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2. Eisner v. Macomber, 252 U.S. 189 (1920): '... As repeatedly held, (16th Amendment) this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 240 U. S. 112 et seq.; Peck & Co. v. Lowe, 247 U. S. 165, 247 U. S. 172-173.

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3. Stanton v. Baltic Mining Co., 240 U.S. 103 (1916), In other words, we are here dealing solely with the restriction imposed by the Sixteenth Amendment on the right to resort to the source whence an income is derived in a case where there is power to tax for the purpose of taking the income tax out of the class of indirect, to which it generically belongs, and putting it in the class of direct, to which it would not otherwise belong, in order to subject it to the regulation of apportionment

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