What Is a Payroll Tax?

Anyone working in the United States pays a payroll tax, --although you may not realize it if you’re not paying attention to your pay stubs.

Likewise, if you run a business and have employees on a payroll, you are required to pay payroll taxes as well. So what exactly does that mean, how do you pay it, and where does the money go? 

If you’re an employee wondering where that chunk that’s always taken out of your paycheck is going, or an employer looking to understand a bit more about the payroll tax process, read on, because we’ll cover it all below!

What Exactly is a Payroll Tax?

Essentially, a payroll tax is a tax you pay to the government on behalf of your employees (or, if you’re an employee yourself, it’s a tax that your employer pays on your behalf). The money is generally withheld from the employee’s pay; the exact amount withheld is based on their wages, salaries, and tips. The deducted taxes are then paid directly to the Internal Revenue Service (IRS) by the employer. However, employers are also required to pay a portion of their business’s payroll tax, so it doesn’t all come from the paychecks of their employees—--we’ll get into that a bit more later on. 

What Are Payroll Taxes Used For?

Unlike federal income taxes, which go towards the government’s general funding, U.S. payroll taxes are used to fund social insurance programs like Social Security and Medicare. Combined, these are referred to as FICA taxes. On pay stubs, they’re labeled as MedFICA and FICA.

The Social Security tax is 12.4 percent, while the Medicare tax is 2.9 percent. Together, this is a total of 15.3 percent in taxes that businesses must deposit to the IRS. Half of this (7.65 percent) is paid directly by the employer, while the money withheld from their employees’ paychecks makes up the other half. 

Other payroll taxes employers and employees are required to pay can vary by state and local governments, and may include unemployment, disability, and workers’ compensation. 

How Are Payroll Taxes Calculated and Paid?

The amount of taxes withheld from an employee’s paycheck is based on their gross pay (calculated by their employer) and the information provided on their most recently completed W-4 form. Like we’ve said, only half of a business’s FICA payroll taxes come out of employee paychecks, so an employer must also calculate the amount they have to pay in addition to this. 

As an employer, you have several responsibilities when it comes to payroll taxes. You generally have to deposit and report federal income tax, Social Security, and Medicare taxes to the IRS on a monthly or semi-weekly basis. You choose how often you will deposit these taxes at the beginning of each tax year—--it’s usually based on the size of your total employee payroll. You’re also required to report payroll taxes quarterly, either through Form 941 or e-file. 

While payroll taxes may seem like a chore, it’s important to take them seriously and keep up with your deposits. If you fail to pay your business’s payroll taxes on time and send them in late, it could result in fines. For the first five days late, the fine will be 2% of the past-due amount. After ten 10 days, the penalty can become as high as 15%.

Understanding Payroll Taxes Makes Compensating Employees a Pain-Free Task

The bottom line is that nearly everyone has to deal with payroll taxes. While the process may seem confusing or intimidating at first, especially if you’re an employer just getting started, it isn’t too hard to understand when you break it down—--the important thing is to make sure you pay them on time.

Many people utilize online payroll software to automate their payroll taxes. Paycom is one of these online payroll providers. Learn more about Paycom reviews, pricing, and features.