Payroll tax
Encyclopedia
Payroll tax generally refers to two different kinds of similar tax
es. The first kind is a tax that employers are required to withhold from employees' wage
s, also known as withholding tax
, pay-as-you-earn tax (PAYE), or pay-as-you-go tax
(PAYG). The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.
es are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions. Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4. Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.
upon filing an income tax return for the year.
Employers are required to pay payroll taxes to the taxing jurisdiction under varying rules, in many cases within 1 banking day. Payment of Federal and many state payroll taxes is required to be made by electronic funds transfer
if certain dollar thresholds are met, or by deposit with a bank for the benefit of the taxing jurisdiction.
A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS. The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.
) requires withholding tax on employment income (payroll taxes of the first type), under a system known as pay-as-you-go
(PAYG).
The individual states impose payroll taxes of the second type.
, payroll tax accounts for over a third of the annual national budget, making it the primary source of government revenue. The tax is paid by employers based on the total remuneration (salary and benefits) paid to all employees, at a standard rate of 14% (though, under certain circumstances, can be as low as 4.75%). Employers are allowed to deduct a small percentage of an employee's pay (around 4%). Another tax, social insurance
, is withheld by the employer.
employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket
). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system. Depending on the company's main activity, the employer must also contribute to federally-funded insurance and educational programs. There is also a required deposit of 8% of the employee's wages (not withheld from him) into a bank account that can be withdrawn only when the employee is fired, or under certain other extraordinary circumstances, such as serious illness (called a "Security Fund for Duration of Employment"). All these contributions amount to a total tax burden of almost 40% of the payroll for the employer and 15% of the employee's wages.
in Canada applies a payroll tax of 2% to all employees. It is an example of the second type of payroll tax, but unlike in other jurisdictions it is paid directly by employees rather than employers. Unlike the first type of payroll tax as it is applied in Canada, though, there is no basic personal exemption below which employees are not required to pay the tax.
Ontario applies a health premium tax to all payrolls on a sliding scale up to $900 per year.
, the payroll tax is a specific tax which is paid to states and territories by employers, not by employees. The tax is not deducted from the worker's pay. The Chinese Government itself requires only one tax to be withheld from paychecks: the PAYG (or pay-as-you-go) tax, which includes medicare levies.
, the payroll tax is composed of several items:
, salary tax is capped at 15%. Depending on income, employers fall into different tax brackets.
, pay as you earn (PAYE) income tax and Employees' National Insurance
contributions are examples of the first kind of payroll tax, while Employers' National Insurance contributions are an example of the second kind of payroll tax.
There are currently (July 2011) four PAYE income tax bands: 20% on annual income up to £35,000 40% from £35,001 to £150,000 and 50% on all income above £150,000. The fourth rate of 10% is paid on income from savings up to £2,560 per annum only and is not paid if non-savings income is in excess of this limit.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es. The first kind is a tax that employers are required to withhold from employees' wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s, also known as withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
, pay-as-you-earn tax (PAYE), or pay-as-you-go tax
Pay-as-you-go tax
Pay as you go is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business, or investment for the current income year...
(PAYG). The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.
In the United States
In the United States, payroll taxes are assessed by the federal government, all fifty states, the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases and are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.Income tax withholding
Federal, state, and local withholding taxWithholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
es are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions. Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4. Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.
Social Security and Medicare taxes
Federal social insurance taxes are imposed equally on employers and employees, consisting of a tax of 6.2% of wages up to an annual wage maximum ($106,800 in 2010) for Social Security and a tax of 1.45% of all wages for Medicare. For the year 2011, the employee's contribution has been temporarily reduced to 4.2%, while the employer's portion remained at 6.2%. To the extent an employee's portion of the 6.2% tax exceeded the maximum by reason of multiple employers, the employee is entitled to a refundable tax creditTax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
upon filing an income tax return for the year.
Unemployment taxes
Employers are subject to unemployment taxes by the federal and all state governments. The tax is a percentage of taxable wages with a cap. The tax rate and cap vary by jurisdiction and by employer's industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000. Some states also impose unemployment, disability insurance, or similar taxes on employees.Reporting and payment
Employers must report payroll taxes to the appropriate taxing jurisdiction in the manner each jurisdiction provides. Quarterly reporting of aggregate income tax withholding and Social Security taxes is required in most jurisdictions. Employers must file reports of aggregate unemployment tax quarterly and annually with each applicable state, and annually at the Federal level. Each employer is required to provide each employee an annual report on IRS Form W-2 of wages paid and Federal, state and local taxes withheld, with a copy must to the IRS and many states. These are due by January 31 and February 28 (March 31 if filed electronically), respectively, following the calendar year in which wages are paid. The Form W-2 constitutes proof of payment of tax for the employee.Employers are required to pay payroll taxes to the taxing jurisdiction under varying rules, in many cases within 1 banking day. Payment of Federal and many state payroll taxes is required to be made by electronic funds transfer
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
if certain dollar thresholds are met, or by deposit with a bank for the benefit of the taxing jurisdiction.
Penalties
Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%. Similar state and local penalties apply. Failure to properly file monthly or quarterly returns may result in additional penalties. Failure to file Forms W-2 results in an automatic penalty of up to $50 per form not timely filed. State and local penalties vary by jurisdiction.A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS. The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.
Australia
The Australian federal government (ATOAustralian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
) requires withholding tax on employment income (payroll taxes of the first type), under a system known as pay-as-you-go
Pay-as-you-go tax
Pay as you go is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business, or investment for the current income year...
(PAYG).
The individual states impose payroll taxes of the second type.
Bermuda
In BermudaBermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, payroll tax accounts for over a third of the annual national budget, making it the primary source of government revenue. The tax is paid by employers based on the total remuneration (salary and benefits) paid to all employees, at a standard rate of 14% (though, under certain circumstances, can be as low as 4.75%). Employers are allowed to deduct a small percentage of an employee's pay (around 4%). Another tax, social insurance
Social insurance
Social insurance is any government-sponsored program with the following four characteristics:* the benefits, eligibility requirements and other aspects of the program are defined by statute;...
, is withheld by the employer.
Brazil
In BrazilBrazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket
Tax bracket
Tax brackets are the divisions at which tax rates change in a progressive tax system . Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.-Example:Imagine that there are three tax brackets: 10%, 20%, and 30%...
). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system. Depending on the company's main activity, the employer must also contribute to federally-funded insurance and educational programs. There is also a required deposit of 8% of the employee's wages (not withheld from him) into a bank account that can be withdrawn only when the employee is fired, or under certain other extraordinary circumstances, such as serious illness (called a "Security Fund for Duration of Employment"). All these contributions amount to a total tax burden of almost 40% of the payroll for the employer and 15% of the employee's wages.
Canada
The Northwest TerritoriesNorthwest Territories
The Northwest Territories is a federal territory of Canada.Located in northern Canada, the territory borders Canada's two other territories, Yukon to the west and Nunavut to the east, and three provinces: British Columbia to the southwest, and Alberta and Saskatchewan to the south...
in Canada applies a payroll tax of 2% to all employees. It is an example of the second type of payroll tax, but unlike in other jurisdictions it is paid directly by employees rather than employers. Unlike the first type of payroll tax as it is applied in Canada, though, there is no basic personal exemption below which employees are not required to pay the tax.
Ontario applies a health premium tax to all payrolls on a sliding scale up to $900 per year.
China
In ChinaPeople's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
, the payroll tax is a specific tax which is paid to states and territories by employers, not by employees. The tax is not deducted from the worker's pay. The Chinese Government itself requires only one tax to be withheld from paychecks: the PAYG (or pay-as-you-go) tax, which includes medicare levies.
Croatia
In CroatiaCroatia
Croatia , officially the Republic of Croatia , is a unitary democratic parliamentary republic in Europe at the crossroads of the Mitteleuropa, the Balkans, and the Mediterranean. Its capital and largest city is Zagreb. The country is divided into 20 counties and the city of Zagreb. Croatia covers ...
, the payroll tax is composed of several items:
- national tax on personal income , which is applied incrementally with rates of 0% (personal exemption), 15%, 25%, 35%, 45%
- optional local surcharge on personal income , which is applied by some cities and municipalities on the amount of national tax, currently up to 18% (in ZagrebZagrebZagreb is the capital and the largest city of the Republic of Croatia. It is in the northwest of the country, along the Sava river, at the southern slopes of the Medvednica mountain. Zagreb lies at an elevation of approximately above sea level. According to the last official census, Zagreb's city...
) - pension insurance , universal 20%, for some people divided into two different funds, one of which is government-management (15%) and the other is a selected pension fund (5%)
- health and unemployment insurance , divided into 15% for general health insurance, 0.5% for work-related accident insurance, and 1.7% for unemployment insurance
Hong Kong
In Hong KongHong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, salary tax is capped at 15%. Depending on income, employers fall into different tax brackets.
Sweden
In 2010 the statutory Swedish payroll tax paid by the employer is 31.42 percent of the employee salary. In addition, employers often pay 5 to 15 percent in fees to social insurances, according to agreements between employers and the union. These additional charges are not taxes, however, and are not paid to the authorities, but to various pension funds.United Kingdom
In the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, pay as you earn (PAYE) income tax and Employees' National Insurance
National Insurance
National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...
contributions are examples of the first kind of payroll tax, while Employers' National Insurance contributions are an example of the second kind of payroll tax.
There are currently (July 2011) four PAYE income tax bands: 20% on annual income up to £35,000 40% from £35,001 to £150,000 and 50% on all income above £150,000. The fourth rate of 10% is paid on income from savings up to £2,560 per annum only and is not paid if non-savings income is in excess of this limit.
External links
- What are Payroll Taxes?
- Payroll tax in China
- Payroll tax (Chinese Tax Office)
- US Payroll Tax Tables
- US Payroll Tax Tables by ZIP Code
- IRS publication 15 - detailed information on federal payroll tax in the U.S.