Sign Up for Discounts
This form does not yet contain any fields.
    Follow us on Facebook
    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library
    Tuesday
    Oct302012

    How to calculate payroll tax liabilities

    Payroll taxes are comprised of taxes that are paid by employees, and taxes that are paid by the employer. The employer withholds those taxes that are paid by employees, and remits them to the applicable government authorities, along with the taxes that are paid by the company.

    Thus, the employer acts as an agent for the government, in that it collects payroll taxes from employees and remits them to the government. The payroll tax liability is comprised of both groups of taxes, since the employer is responsible for remitting all of them to the government. The employee is not responsible for remitting any taxes directly associated with a paycheck.

    The payroll tax liabilities that are paid by employees are:

    • Social security tax. The linked table contains the most recent tax rates.
    • Medicare tax rate. The linked article contains the most recent tax rates.
    • State and local income tax withholdings. This is not technically a tax, but rather an advance payment to the government on the income tax that employees will compute following the end of the tax year.

    The payroll tax liabilities that are paid by the employer are:

    • Social security tax. The linked table contains the most recent tax rates.
    • Medicare tax rate. The linked article contains the most recent tax rates.
    • Unemployment tax. This tax can be substantial, depending on the company's layoff history. A history of laying off large numbers of employees in the recent past can trigger a sizeable state tax. A portion of the unemployment tax is paid to the state government, and a smaller amount to the federal government.

    In addition, the city or county in which a company is located or an employee resides may charge other taxes. For example, a city may charge a head tax for every person employed within the city limits.

    When payroll is outsourced, the payroll provider calculates all of these taxes and remits them on behalf of the employer, thereby effectively eliminating the work load of the employer in regard to calculating payroll tax liabilities.

    The aggregated tax rate that an employer pays tends to decline somewhat over the course of a calendar year, since some taxes are capped at a certain amount of employee pay, and do not apply to any compensation earned above the cap limit. Thus, employees with higher compensation tend to pay a slightly lower tax rate on their earnings later in the year, which is reflected in the matching taxes that the employer pays.

    Related Topics

    Are payroll withholding taxes an expense or a liability? 
    What is accrued payroll? 
    What is net pay? 
    What is the difference between salary and wages? 
    What is the employer FICA match?