What is payroll tax?
Payroll tax is an obligation required by law to support certain Federal and State programs, as well as collect and remit employee estimated personal income taxes. Most businesses use payroll processors to calculate and remit these taxes, but you may still be wondering what they all are.
Why is payroll tax important?
- Failure to pay taxes may result in heavy fines up to 15% of total tax, and the IRS may place a lien on your business or liquidate your assets to satisfy the debt.
So, what are these taxes?
The blanket term ‘payroll tax‘ consists of the following types of tax:
Social Security and Medicare (FICA tax)
- Paid by employer and employee equally (7.65% each for a total of 15.3%).
- Employee amount is ‘withheld’ from paychecks and sent to the IRS.
- Employer amount is an additional cost on top of wages that are remitted to the IRS with the employee portion.
- Withheld from employees’ wages and paid directly to the federal and state government on their behalf. Some states don’t have income tax (so no withholding). There is also occasionally local withholding for city taxes.
- These amounts show up on W2s at the end of the year and are used in personal income tax calculations. There is no expense for the employer.
- This tax is used to fund reemployment and unemployment benefits for employees who were discharged through no fault of their own (ex.- layoff). It’s applicable in every state.
- There is also a federal unemployment tax, which is calculated annually and takes into account what was paid to state agencies.