Taxes that employers are required to withhold from employees’ wages and pay to government agencies, along with employer-paid contributions, to fund programs like Social Security, Medicare, and unemployment insurance.
What is Payroll Tax?
Payroll taxes are mandatory contributions collected from both employees and employers based on employee wages. In the United States, these taxes primarily fund federal programs such as Social Security and Medicare, as well as federal and state unemployment insurance. Employers are responsible for withholding the employee portion from wages and remitting it to the appropriate tax authorities, along with their own matching or additional contributions.
For employees, payroll taxes include the Federal Insurance Contributions Act (FICA) taxes: 6.2% for Social Security (up to an annual wage cap) and 1.45% for Medicare (with an additional 0.9% Medicare tax for high earners). Employers must match the Social Security and Medicare amounts withheld from employees. In addition, businesses may need to pay Federal Unemployment Tax Act (FUTA) and state unemployment taxes (SUTA), which are not withheld from employee pay but are funded by the employer.
For non-U.S. residents operating a U.S. business, payroll taxes come into play when hiring employees rather than independent contractors. Businesses must register for the necessary employer tax accounts at both the federal and state levels, accurately calculate withholdings, file required payroll reports, and make timely payments. Failure to properly manage payroll taxes can lead to penalties, interest charges, and legal consequences.
Understanding payroll taxes is essential for maintaining compliance, budgeting labor costs accurately, and protecting the business from costly liabilities.
