Payroll taxes definition
/What are Payroll Taxes?
Payroll taxes are imposed by a government on employee wages and salaries. The taxes may be solely withheld from employee pay, or the employer may be required to match the withholding, or the employer is solely responsible for payment. In any case, the employer then remits the funds to the government. These taxes must also be paid by a self-employed person. There are a number of payroll taxes that may be imposed, including the taxes noted below:
Social security tax. Social security is used to fund the social security retirement program. A portion of the tax is withheld from employee pay, which the employer matches and then remits to the federal government.
Medicare tax. Medicare is used to fund the Medicare healthcare program for older citizens. The tax applies to all wages earned; there is no wage cap beyond which the tax no longer applies.
Unemployment tax. The unemployment tax is used to bolster an unemployment compensation fund for laid off workers. These funds are administered at the state level.
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Local Payroll Taxes
Local governments may add additional payroll taxes to cover local programs, typically for relatively small amounts. For example, a government might impose a head tax, which is a flat fee charged for each person working within its jurisdiction. Or, it might impose a fee for a sports district, to pay for a sports stadium.
Reporting of Payroll Taxes
The payroll taxes withheld from a person's pay are itemized on the remittance advice (pay stub) that accompanies each paycheck. The remittance shows gross pay, payroll taxes, other withholdings, and net pay. This is quite useful for employees, who can review it to see if the correct deductions are being taken from their pay.
Presentation of Payroll Taxes
The employer presents all payroll taxes paid or accrued within a reporting period within the compensation line item on the income statement, or it may be reported as a separate expense. Any tax liability not yet remitted to the government is reported within the current liabilities section of the balance sheet.