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

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

Answer: (D)

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 certain period, usually a year.
2. Review each tax option to identify if it has a ceiling on taxable earnings:
3. 1. State sales tax: This is a tax on purchases, not on earnings, so it does not have a ceiling on earnings.
4. 2. Medicare payroll tax: This tax applies to all earnings without a cap, meaning there is no ceiling on the amount of earnings subject to Medicare tax.
5. 3. Federal income tax: This tax applies progressively to all income, but there is no fixed ceiling on taxable income; higher incomes are taxed at higher rates without an upper limit on taxable earnings.
6. 4. Social Security payroll tax: This tax has a maximum taxable earnings limit each year, meaning earnings above this ceiling are not subject to Social Security tax.