'Payroll Tax' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Payroll tax refers to the specific withholding tax that employers take from their employees’ checks. They do this for their employees so that they can pay it to the national (and sometimes also state or provincial and local) government. These tax amounts are deducted based upon the salaries or wages of the employees in question. In the majority of nations such as the U.S., the federal government (and many provincial or state governments as well) levy some kind of a payroll tax.
Such governing bodies deploy the revenues they gain from their payroll taxes in order to pay for specific government services and programs such as health care, retirement benefits (like Social Security income), workers compensation, and more. Besides these large scale national programs, local governments sometimes also levy smaller payroll taxes so that they can improve and maintain in good condition the area specific programs and infrastructure. This would includes such vital services and programs as road maintenance, first responders’ emergency services, and parks and recreation programs, among others.
A payroll tax which is deducted is generally itemized out for the employees on their payroll stub. On such an specific breakdown as this, it usually denotes the amounts which Social Security and Medicare programs took from their pay, along with the municipal and/or state taxes held.
The Federal payroll taxes within the U.S. include contributions for Medicare and Social Security. In the year 2016, employers were required by law to hold back 6.2 percent of all employee earnings as a payroll tax. Besides this, the employers themselves are required to match these amounts from all employee payrolls and then turn in the two amounts to the IRS Internal Revenue Service.
As an example, for those employers who pay their workers $2,000, they will be required to hold back $124 in the federal component of payroll taxes. The employing company also must match this dollar amount. They send in an aggregate amount of $248 for the employee in this case directly to the IRS.
Employers only had to do withholding on payroll taxes for the initial $118,500 of employee earnings as of 2015. On income amounts higher than this, they withhold another .9 percent of all net earnings. This is a special extra Medicare tax. Employers are not mandated to do their matching portion of this additional tax on employee income.
With all those who are self employed, the procedure is different. Self-employed individuals such as small business owners and independent contractors have no employer who can withhold and turn in their payroll tax for them. This means that they will have to be their own accountants and pay these taxes directly. These are known as self-employment taxes, even though they are basically the same as payroll taxes.
Because the self employed do not have any counter-party to match their payroll deductions, they have to pay a punishing 12.4 percent of all earnings to the Social Security Trust Fund and another 2.9 percent to the Medicare Trust Fund, as of 2015. These taxes are levied by the IRS on all earning up to $118,500. Beyond this dollar amount, the extra .9 percent Medicare tax still applies, as with the payroll taxes.
Payroll taxes should not be confused with income taxes. The main difference is that such payroll taxes cover particular programs. They are kept separate from the government primary revenues collected through the national income taxes that go instead into the government’s general coffers. All employees have to pay their flat payroll tax, even though this is regressive. Income taxes are instead progressive, meaning that the rates increase along with higher earnings. Income taxes are never matched by employers either. Self-employed people will not pay higher income taxes than their employed counterparts as they must with the payroll tax.