Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) and often covering advance payment of income tax and social security contributions. 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. The charges paid by the employer usually covers the employer's funding of the social security system.
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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.[1]
Federal, state, and local withholding taxes 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.[2] 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.[3] 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.[4]
Federal social insurance taxes are imposed equally on employers[5] and employees,[6] 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.[7] For the year 2011, the employee's contribution has been temporarily reduced to 4.2%, while the employer's portion remained at 6.2%.[8] 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 credit upon filing an income tax return for the year.[9] This reduction in individual contributions to the national US retirement benefit system, which undermines an already underfunded system by reducing funds available to be paid to individuals in the future, has been touted as a tax cut.[10]
Employers are subject to unemployment taxes by the federal[11] and all state governments. The tax is a percentage of taxable wages[12] 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.[13] Some states also impose unemployment, disability insurance, or similar taxes on employees.[14]
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.[15] Employers must file reports of aggregate unemployment tax quarterly and annually with each applicable state, and annually at the Federal level.[16] Each employer is required to provide each employee an annual report on IRS Form W-2[17] 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.[18]
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.[19]
Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%.[20] 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.[21] 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.[22]
The Australian federal government (ATO) 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.
In Bermuda, payroll tax accounts for over a third of the annual national budget, making it the primary source of government revenue.[23] 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%).[24] Another tax, social insurance, is withheld by the employer.
In Brazil 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.
The Northwest Territories 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.[25] Ontario applies a health premium tax to all payrolls on a sliding scale up to $900 per year.[26]
In China, the payroll tax is a specific tax which is paid to provinces 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.
In Croatia, the payroll tax is composed of several items:
In France statutory payroll tax only covers employee and employer contributions to the social security system. Income tax deductions from the payroll are voluntary and may be requested by the employee, in which case employees will receive an income tax assesment at year end. Employee payroll tax is made up of assigned taxes for the three branches of social security system and includes both basic and supplementary coverage. Different percentages apply depending on thresholds that are multiples of the social security earnings cieling (in 2012 = 36,372 euro per year) [27].
align="left"| Unemployment
| Tax covering | Employee | Employer | |||||
|---|---|---|---|---|---|---|---|
| Total social security contributions | |||||||
| Medical, Maternity, Invalidity, Death, Solidarity | 0.75% | 13.1 % | |||||
| Child Benefits | None | 5.4 % | |||||
| Old Age minimum | 6.75% | 9.90 % | |||||
| Unemployment | 2.40% | 4.00% | |||||
| Insolvency | 0.30% | ||||||
| Old Age branch supplementary (minimum) | 6.65% | 8.3% | |||||
| General social tax | 7.50% | none | |||||
| Social security debt reimbursal levy | 0.50% | none | |||||
| Tax payable on all income | |||||||
| Medical, Maternity, Invalidity, Death, Solidarity | 0.75% | 13.1 % | |||||
| Child Benefits | None | 5.4 % | |||||
| Old Age minimum | 0.10% | 1.6 % | |||||
| General social tax | 7.50% | none | |||||
| Social security debt reimbursal levy | 0.50% | none | |||||
| Tax payable on income up to earnings ceiling | |||||||
| Old Age minimum | 6.65% | 8.3 % | |||||
| Old Age branch supplementary | 3.8% | 5.7 % | |||||
| Tax payable on income up to four-times earnings ceiling | |||||||
| 2.40% | 4.00% | ||||||
| Old Age branch supplementary | 8.6% | 13.9 % | |||||
| Tax payable on income between four and eight-times earnings ceiling | |||||||
| Old Age branch supplementary | 0.13% | 0.22 % | |||||
In addition to income tax withheld employees and employers in Germany must pay contributions to finance social security benefits. The following table shows employee and employer contributions by category. Contributions are payable only on wages up to the social security threshold (in 2012 = 67,000 euro per year):
| Tax covering | Applies since | Employer | Employee | Notes |
|---|---|---|---|---|
| Old Age (pension) | January 2009 | 9.95 % | 9.95 % | |
| Healthcare | January 2011 | 7.3 % | 8.2 % | |
| Unemployment | January 2011 | 1.5 % | 1.5 % | |
| Care in old age | January 2009 | 0.975 % | 0.975 % | 1.225 % childless employees over 23 Jahre 1.475 % in Saxony |
| Accident | 1.6 % | -- | depends on risk covered | |
| Sick pay | 0.6 % | -- | ||
| Maternity | 0.07 % | -- | ||
| Insolvency | 0.10 % | -- | Payment of outstanding salary in case of bankrupcy |
An employer is obligated to deduct tax at source from an employee and to make additional contributions to social security as in many other EU member states. The employer's contribution amounts to 28.06% of the salary. The employee's contribution is 16%.
http://en.wikipedia.org/wiki/Taxation_in_Greece#Social_Security_Tax
Income tax is extra.
In Hong Kong, salary tax is capped at 15%.[28] Depending on income, employers fall into different tax brackets.[28]
In 2010 the statutory Swedish payroll tax paid by the employer is 31.42 percent of the employee salary.[29] 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.
In the United Kingdom, 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.[30][31]. In addition employees pay a national insurance contribution of 12%, while employers pay 12.8%. The contributions are not paid on the total salary but only above a lower threshold[32]