Most of us experience, or have experienced, payroll tax withholding but with more recent discussions about the topic, what exactly are payroll taxes? It is helpful for any taxpayer who is seeing their hard-earned dollars withheld every month to understand what payroll taxes are.
What are payroll taxes?
Payroll taxes are taxes paid by an employer on the employee’s behalf and are held back from the worker’s pay. If the worker is an employee, and not an independent contractor designation, the employer is required by law to withhold federal and state income tax, if applicable, for the employee. The amount that is withheld each month, or out of each paycheck, depends on the employee’s rate of pay, filing status and amount of claimed allowances.
What are payroll taxes used for?
There are several different types of tax that are withheld in payroll taxes including:
- Federal income tax withholding:
- State income tax withholding where applicable;
- Social Security taxes;
- Medicare taxes; and
- Federal and state unemployment taxes
All workers, unless they are classified as independent contactors, are subject to payroll tax collection which typically comes out of the worker’s paycheck before they see it or receive it. Determining if the worker is an independent contractor depends on the amount of control the worker has over how the work is performed. Independent contractors pay these taxes themselves.
Payroll taxes impact most workers which is why it is important to understand what they are. Workers should also understand how employment tax law can help them with payroll tax concerns and other employment tax concerns they may have during the course of their employment.