Payroll Tax

A payroll tax is a tax that must be withheld from an employee’s payroll check. An employer is responsible for withholding these taxes. They become liable for paying the taxes, not the employee. Not only must an employer withhold these taxes and remit them to the IRS and other tax agencies, but they must also keep a record of all paid payroll taxes and also any amounts that are owed. It is not required for a business to withhold payroll taxes on any amounts paid to independent contractors. However, it is always very important for a business owner to understand the exact differences between independent contractors and employees; this is mostly because the penalties for misclassification can be extremely harsh.

It is not uncommon for a business to fall behind in paying their owed payroll taxes, or to not file all required associated tax reports. Many businesses fail when they fall behind in these taxes because not only can they not afford to pay their owed taxes but also all late fees and penalties that are associated with paying payroll taxes late. Even if businesses file for bankruptcy, in many cases they are still responsible for all owed payroll taxes.

Types of Payroll Taxes

1. Income tax: This is the regular payroll tax that must be held from all employee’s payroll checks. By filling out a W-4 Form an employee can adjust the amount of income tax that is withheld from their payroll check. It is ideal that a person’s total income tax that is withheld will come close to the amount of any taxes they are liable for at the end of the year; this is so the employee will not owe taxes at the end of the year, but hopefully be owed an amount back from the IRS.
2. FICA taxes: These taxes are withheld under the Federal Insurance Contribution Act, and they include amount contributed to Social Security and Medicare programs. 7.65 percent of a person’s income must be withheld to be put toward these programs, and employers must also match these withholdings.
3. FUTA tax: These taxes are Federal Unemployment Tax, and the amounts withheld are equal to about 1% of the first $7,000 an employee earns. These taxes are always paid in full by an employee’s employer.

Continued Payroll Taxes Definitions
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