Emily Clarke

The Basics of Payroll Taxes

Whether you're an employee or you run a business, the term "payroll tax" is an important term and concept you need to understand. Payroll taxes are a significant form of government revenue yet they are often misunderstood or not understood correctly at all! If you're wondering what payroll taxes are, how they work, and why they're important to understand, this article will cover the basics.

What is a payroll tax?

Payroll taxes are taxes that both employees and employers must pay. The employee pays a part of these taxes via a payroll deduction and the employer pays the remaining part to the IRS. The amount of tax is calculated based on the employee's wages and tips earned, as well as the salaries the employer pays to the employee. In the U.S., payroll taxes are used to fund Social Security and Medicare.

As an employee, you can see how much you pay in payroll taxes by looking at your pay stub. On the other side of the table, employers can determine how much they should pay to the IRS in payroll taxes by working with a bookkeeper, tax professional, or by using a Canada payroll software.

Types of payroll taxes

There are four main types of payroll taxes:

1. Federal income: This is deducted from employee paychecks and used as a source of revenue for the government to fund public services, provide goods to the public, and more.
2. Social Security: All the funds paid to Social Security taxes go into two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivor benefits, and the Disability Insurance Trust Fund, which pays disability benefits.
3. Medicare: These payroll taxes also go into two separate trusts: the Hospital Insurance Trust Fund, which pays for Medicare Part A, and the Supplementary Medical Insurance Trust Fund, which pays for Medicare Parts B and D, as well as program administration costs.
4. Federal unemployment: If an employer lays off an employer, the employee is entitled to unemployment benefits. Employers are primarily responsible for funding unemployment insurance.

What's the difference between payroll taxes and income taxes?

Payroll taxes and income taxes are not the same thing and there are a couple distinct ways in which they are different:

• While payroll taxes are used by the U.S. government to fund specific programs (Social Security and Medicare), income taxes just go into the government's general fund.
• In addition, payroll tax is a regressive tax, meaning the tax is applied uniformly across the board. Everyone pays a flat payroll tax rate up to a yearly cap. Comparatively, income tax is a progressive tax, which means it's based on an individual's earnings and their ability to pay.

If you're an employer and you're confused about payroll taxes and how they apply to your business, you can use a Canada payroll software to do the work for you or hire an accountant to help you with your taxes. Although you may not be excited about paying for a Canada payroll software or an accountant, it's well worth the expense. If you do not pay payroll taxes, pay them late, or don't follow the correct guidelines, you can face severe penalties and accrue interest.

Author Resource:-

Emily Clarke writes about employee management, benefits and payroll service. You can find her thoughts at HR software blog.