Which of the following taxes has a ceiling on the amount of annual earnings subject to tax?

• A. State sales tax
• B. Social Security payroll tax
• C. Federal income tax
• D. Medicare payroll tax

Answer: (B)

Verified step by step guidance

1. Understand the concept of a tax ceiling: A tax ceiling means there is a maximum limit on the amount of income or earnings that can be taxed within a year.
2. Review each tax option to identify if it has a cap on taxable earnings:
3. State sales tax is generally applied to purchases and does not have a ceiling on earnings because it is not based on income but on consumption.
4. Federal income tax applies progressively to all taxable income without a fixed upper limit on earnings subject to tax, although rates vary by income brackets.
5. Medicare payroll tax applies to all earnings without a ceiling, meaning all wages are subject to this tax regardless of amount.
6. Social Security payroll tax has a specific annual earnings limit (taxable maximum), above which earnings are not subject to this tax, indicating it has a ceiling on taxable earnings.