What are payroll taxes?

Payroll tax calculation is a crucial part of payroll processing. Before payments can be issued to employees, the payroll team first needs to determine how much they need to deduct from wages and salaries to cover statutory income and payroll tax levies.

What are payroll taxes? How do they differ from income tax? What are payroll taxes levied on? Who pays payroll taxes?

Payroll taxes are taxes that are levied on employees and employers and calculated based on employee salaries and wages. In the case of employee payroll taxes, the amounts are withheld by the employer and then remitted to the respective tax authorities.

However, it is important to remember that there is no standardized international definition of payroll taxes. Some countries use the term to primarily refer to different contributions to the social security system.

Other countries, on the other hand, use the term more loosely to refer to all types of taxes employers incur when employing and paying employees, hence including everything from social security contributions to unemployment insurance, sometimes even including employee income tax.

Yet in other countries, the term ‘payroll tax’ refers to a specific tax levied on employers which is calculated based on the total payroll sum. For instance, this is the case for Australia where states and territories levy an additional payroll tax on the sums payable to an employee by an employer.

Payroll taxes examples

To get a better understanding of what payroll taxes are, it helps to look at some specific examples. As already mentioned, the meaning of the term ‘payroll taxes’ can differ depending on the location. On the most general level, payroll tax can include any tax that is levied on an employee’s wages or salaries. Here is a list of what this can include:

• Federal, state and local income tax,

• Unemployment tax,

• Health insurance contributions,

• Long-term care insurance contributions,

• Pension fund contributions,

• Workers’ compensation insurance levies,

• Disability insurance levies,

• Education levies,

• Church tax,

• Solidarity tax, and

• Self-employment taxes.

In many countries around the world, payroll tax and income tax are treated as two different concepts which differ with regard to two critical factors: one being by whom the tax is paid and the other being what the collected tax money is used for.

Income tax on employment income is exclusively paid by the employee, while payroll taxes are paid by the employee as well as the employer—or, in cases like Australia, solely by the employer.

Payroll taxes are used for funding specific social security programs (or other government-led schemes destined to improve the social welfare of employees). Money collected from federal, state and local income tax, on the other hand, is used for public services, infrastructure, and government spending in general.

Another difference between income tax and payroll tax that holds true for many countries are the tax rates. In many countries, payroll taxes are levied at a fixed rate that applies to all employees and employers (except maybe for low-income earners who are often exempt), while income tax rates are often progressive.

Having said that, there also are cases where income tax is considered a part of the overall payroll tax burden.

So, how are payroll taxes calculated? The first step when it comes to determining how much payroll tax to withhold from employee salaries and wages is to know the current tax rates. Thereafter, businesses just need to follow a couple of simple steps to work out the amount of tax they need to withhold from employee paychecks.

1. Calculating employee gross wages and salaries

2. Subtracting non-taxable pay elements and pre-tax deductions

3. Calculating payroll taxes according to current local rates 

The easiest way to ensure accurate payroll calculations is to outsource payroll to an experienced payroll provider or use payroll software.

Payroll tax calculator

Payroll taxes make up a major part of the total cost of an employee. Therefore, businesses need to know upfront how much they will pay in payroll costs before hiring a new employee—especially when hiring international employees. Global employment cost calculators provide a helpful breakdown of the different costs associated with hiring an employee in a specific jurisdiction.

Not all payroll taxes are calculated and paid in the same way. Some are taken out of the employee’s paycheck, others are levied exclusively on employers, and yet others are split evenly between employee and employer. But what payroll taxes do employers pay?

How big the employer portion of payroll taxes is depends on the country in which the employee is located. Payroll taxes are typically calculated and paid in the employee’s country of residence, which means that all procedures must follow local rules.

Employer taxes on payroll vary greatly between countries. In some countries, they are split (almost) 50/50 between employee and employer. In other countries, the employer payroll tax share is significantly bigger (or smaller) than the employee share.

Payroll taxes are levied on income earned from employment, which means that employers have certain responsibilities towards making sure the adequate amount of tax is deducted from each employee’s pay and then remitted to the authorities in a timely manner. Except for a handful of countries, employers have to handle the following tasks: 

• Calculating the employee share of the payroll taxes,

• Deducting the employee-paid payroll taxes from his or her salary/wages,

• Calculating and paying the employer share of the payroll tax levies,

• Remitting the amounts due to the authorities in charge, and

• Reporting payroll taxes by submitting the necessary payroll tax declarations.

So, to answer the question of who pays payroll taxes: It’s the employer who pays payroll taxes on behalf of the employee. Usually, however, at least a part of this amount is deducted from the employee’s gross earnings.

Employers calculate payroll taxes and pay outstanding amounts to the authorities on behalf of their employees. The payment needs to be submitted in accordance with specific deadlines which vary between countries, states, and regions.

In most cases, withheld payroll taxes need to be paid directly after the payroll run during which they are calculated and taken out of the employee’s wages. However, deadlines for filing statutory payroll reports might differ. Payroll taxes most often need to be filed monthly. But in some cases, tax filing might also be done on a quarterly basis.

Payroll taxes differ from country to country. This not only includes the applicable tax rates, but also the deadlines for tax filing and the way tax levies are distributed between employees and employers. Here is an overview of how payroll taxes are calculated and filed in some highly popular hiring destinations around the world.

Payroll taxes in the United States

In the United States, statutory payroll taxes include federal Social Security and Medicare levies, unemployment taxes, and income taxes. Other common payroll deductions include 401(k) plan contributions and wage garnishments.

Payroll tax rates for employers are currently set as follows:

• Federal Unemployment Tax (FUTA): 6% on the first USD 7,000 of an employee’s wages

• State Unemployment Insurance: varies from state to state

• Old-Age, Survivors, and Disability Insurance (OASDI): 6.2% on the first USD 168,600 of an employee’s wages

• Medicare: 1.45% on all wages plus additional 0.9% on wages exceeding USD 200,000

Payroll taxes in Germany

In Germany, statutory payroll taxes are almost split evenly between employee and employer. They include different social security contributions to health insurance, pension, care insurance, and more.

Payroll tax rates for employers are currently set as follows:

• Pension insurance: 9.3%

• Health insurance: 7.3% (plus additional charges levied by healthcare providers)

• Long-term care insurance: 1.7% (2.3% for employees without children)

• Unemployment insurance: 1.3%

• Accident insurance: around 1.3% on average (insurance rates depend on industry and employee occupation)

• Insolvency charge: 0.06%

Payroll taxes in France

The French social security system is highly complex and involves numerous different statutory authorities and institutions, which directly reflects on the calculation of local payroll taxes. In France, payroll taxes include payments to:

• Basic social security coverage (sickness, maternity, disability etc.),

• Family benefits,

• Social security debt reimbursement,

• Unemployment benefits,

• Complementary pension fund,

• Workers compensation, and

• Complementary health coverage (not mandatory).

Payroll taxes in the United Kingdom

In the United Kingdom, payroll taxes mostly consist of contributions to the national insurance and pension scheme. Withheld amounts are paid via the pay-as-you-earn (PAYE) system. Payroll tax rates for employers are currently set as follows:

• National Insurance Contribution (NIC): 13.8% on all earnings above GBP 175 per week

• Pension scheme: at least 3% on an employee’s qualifying earnings