How to calculate payroll tax liabilities

The payroll tax liability is comprised of the social security tax, Medicare tax, and various income tax withholdings. The liability contains 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
  • Medicare tax rate
  • 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
  • Medicare tax rate
  • 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 workload 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 Courses

Human Resources Guidebook 
Payroll Management