What is Payroll Tax?

August 24, 2022

What is payroll tax and how much is it? Learn all about employer payroll taxes, when they are due and how much to expect to pay.

There's a lot to know when it comes to taxes. It can get confusing! Thankfully Check City does its best to make tax filing as simple as possible for you with our tax terminology breakdown. One tax term you may or may not know is payroll tax. This term can apply to both employers and employees. If you're an employee, then you will see payroll taxes being taken out of your paychecks. And if you're an employer, then you'll need to stay on top of filing and reporting payroll taxes to the IRS for all your employees each year. 

File Both Federal and States Taxes at Check City.

Payroll Tax Definition

Payroll tax is simply a way to refer to the taxes that are paid through someone's employee wages or salary. So, payroll taxes are paid by taking a percentage from someone's payroll money. These taxes help pay for things like Social Security, Medicare, and income tax. As an employee, you may see these payroll taxes listed out on your paycheck as items like FICA and MEDFICA, along with the deductions taken from your paycheck total. 

Payroll tax next to a calculator with money

Who Pays Payroll Tax?

Who pays payroll tax can seem complicated at first, but it is actually very simple. Payroll tax payment is taken from the employees' paycheck total. Then, the employer facilitates the actual payment of that payroll tax to the IRS on behalf of their employees. In other words, it is as if you gave a payment to your employer, who then gave the payment to the IRS. 

Payroll Tax Vs Income Tax

Payroll tax and income tax are very similar but they do have some key differences. One of the main differences is who pays what. Payroll tax is paid by the employee, while income tax is paid by the employer. These two types of taxes also go toward different things. Payroll tax goes toward Social Security and Medicare while income tax goes toward government spending and other public services. 

Payroll Tax Deferral 

The most recent payroll tax deferral was in August 2020, when certain payroll taxes (like Social Security) was deferred temporarily from some taxpayers due to the pandemic. This particular payroll tax deferral mostly effected service members and some civilian employees and was in effect from September to December of 2020. It's important to note that tax deferrals mean a tax obligation has been postponed, not taken away. Taxpayers that used the payroll tax deferral repaid those back taxes later in 2021. 

W4 Tax Withholdings

When starting at a new job employees will fill out a W4 tax form to outline how much payroll tax you want taken out of (or withheld) from each paycheck. By increasing your tax withholdings on a W4 you can possibly expect a tax refund each year instead of a tax bill. But by decreasing your withholdings, you can possibly get more money from your paychecks and have more spending money now.  

W4 Form Withholdings

Payroll Tax Forms

There are a great many payroll tax forms, many that you might not have to deal with if you use a tax preparation service. These are the forms you'll need to bring with you to a tax preparer so they can file your tax return for you. 

Tax Form 1040 is the tax form that individuals use to report and file their income tax return for the year. 

Tax Form 1099 is the tax form that individuals use to file taxes for earnings they made as a self-employed freelancer or independent contractor. 

Tax Form W2 is the tax form traditionally employed individuals will receive at the beginning of each year that outlines all their earnings and wages from that employer. 

Tax Form W4 is the tax form that traditionally employed individuals will fill out when they start a new job or would like to make an adjustment to their W4 form on file, which outlines their payroll tax withholdings. 

How Much Is Payroll Tax?

Tax payments are all calculated based on a percentage rate. That means there is a set tax rate that is then used to calculate how much you owe in taxes. This means that how much you owe in taxes will often vary depending on how much money you make. 

The tax rate for payroll tax is divided into two percentages, one tax rate for Social Security taxes, and one tax rate for Medicare taxes. Right now, the tax rate for Social Security taxes is 6.2% for the employee and the tax rate for Medicare taxes is 1.45% for the employee. 

Employers also pay 6.2% for Social Security and 1.45% for Medicare. In total, the Social Security tax rate is 12.4% and the Medicare tax rate is 2.9%. 

Payroll tax with cash on top of it

When Are Payroll Taxes Due?

Since payroll taxes are usually paid alongside each of your paychecks, payroll tax is usually paid to the IRS on a regular basis throughout the year. Employers are generally the ones who are in charge of paying and reporting payroll taxes. Employers are required to regularly report on things like wage payments, income tax withholdings, Social Security tax, Medicare taxes, tips, other compensation, etc. Employees use forms like the 940 Tax Form and the 941 Tax form to report and file these numbers. 

Payroll taxes and the files and reports that go with them are due to be filled out and submitted to the IRS from the employer on a quarterly basis. These quarterly due dates are April 30, July 31, October 31, and January 31 of each year. There are also annual forms that employers need to have filled out and submitted by January 31 of each year, including annual W2 forms that need to be sent out to all their employees. 

In Conclusion, 

Understanding how taxes apply to you is an important part of being a responsible taxpayer. Whether you're an employer or an employee, payroll tax applies to you in some way. Hopefully this article helped you figure out all the ways payroll tax applies to you so you can better understand your personal tax situation.