Payroll Tax Primer

The term “payroll tax” is generally used in reference to two different kinds of taxes that have similar properties and functions. The first is a type of tax that employers are required to withhold from the wages of their employees, which is known as withholding tax, pay-as-you-earn tax or pas-as-you-go tax. The second type is a tax paid from the company or employer’s funds and is directly related to the act of employing a worker, typically consisting of a fixed charge or a fee that is proportional to the employee’s pay. These taxes are paid to the federal government and imposed on employers and employees, as well as on various compensation bases. In general, these are reported quarterly or annually, with electronic reporting required for almost all employers.

Federal , state and local jurisdictions are required to impose a withholding tax if they are imposing an income tax. Employers that have contact with the jurisdiction must withhold the tax from wages paid to their employees. Computation of the amount required is performed by the employer based on the IRS Form W-4, which contains information relevant to the employees’ tax status. The amounts must be paid to the jurisdiction taxing, but are also refundable as tax credits to the employees. The income taxes that are withheld from the payroll are not considered final taxes, but are instead classified as repayments. The employees must still file income tax returns and self assess tax.

Social security and Medicare taxes are also considered payroll taxes. Federal social insurance taxes are imposed on both employers and employees, consisting of 6.3% of wages, with an annual maximum of $06,800 plus a tax of 1.45% of total wages. In 2011, these were changed so that the employee contribution was only 4.2%, while the employer’s portion of the tax remained the same. To the extent that the employee’s portion of the tax exceeded the maximum by reason of multiple employers, the employee is entitled by law to a refundable tax credit upon filing an income tax return for the fiscal year.

There is also the matter of the Federal Unemployment Tax Act, which subjects employers to unemployment taxes. The tax is a percentage of all taxable wages with a cap, with varying caps and rates per jurisdiction and industry, as well as experience rating. The typical maximum, as of 2009, was under $1,000. Some states also impose unemployment taxes on employees.