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What are Payroll Taxes?

Form 1120, corporate income tax   / Credit: Corporate income tax form image via Shutterstock

Payroll tax is a catch-all term that can be used in reference to the taxes that an employer is required to withhold from the paychecks of employees. These taxes are more specifically called either "withholding," "pay-as-you-earn" or "pay-as-you-go taxes."

Payroll tax can also refer to the taxes that employers are required to pay for their employees. Both the federal and the state governments charge both kinds of payroll tax in the United States, with the sums going towards many different uses and purposes.

A portion of payroll taxes withheld from the paychecks of employees goes towards paying off their annual income tax obligations. If the withheld sums are less than the employees' tax obligations, then the employees are required to pay more income tax at tax time; in contrast, if the withheld sums exceed the employees' tax obligations, then those employees might be able to either receive a refund from the IRS or carry their balances into the next period.

Payroll taxes are withheld for both federal and state income tax contributions. The sums and percentages of withholding taxes that go towards income taxes change from year to year but employers can always calculate the amounts by having their employees fill out a W-4 form from the IRS and then following the instructions presented in the IRS's Employer's Tax Guide.

Employers must also pay payroll taxes on behalf of their employees for similar purposes as withholding taxes. These taxes are not withheld from the paychecks of employees but paid out of the pockets of employers. In the United States, employers are required to pay for part of their employees' social security and Medicare contributions. Furthermore, employers are required to pay payroll taxes that help governments pay for unemployment benefits for laid off employees. In contrast to social security and Medicare contributions, unemployment taxes exist on both a federal and a state level, with state unemployment taxes differing from state to state.

Other than employers and their employees, self-employed workers are also often required to pay taxes similar to payroll taxes. In the United States, self-employed workers are required to pay the self-employment tax, which helps pay for social security and Medicare similar to some withholding taxes.