Payroll tax is tax paid by an employer for each employee and deposited into an IRS account. The Internal Revenue Code imposes two forms of employment tax obligations on an employer that both fall under payroll tax. First, the employer is required to pay unemployment insurance taxes, and to make contributions to its employees’ social security and Medicare benefits pursuant to the Federal Insurance Contributions Act (“FICA”- see below). Tax on the employer is calculated according to the number and wages of its employees. Second, the employer is required to withhold from the employee’s paycheck a) the employee liability for federal income tax based on the employees’ wages, and b) employees’ own FICA contributions --Social Security and Medicare. Certain types of wages and compensation are not subject to social security and Medicare taxes. Payroll taxes also include state employer and employee income tax liability. Other payroll taxes, such as municipal income tax, vary from jurisdiction to jurisdiction.
Federal Insurance Contributions Act (FICA) under 26 U.S.C. §3128 (2011), ), is the statutory authority for the payroll deduction of federal tax payments from employers and employees to support Social Security and Medicare. This provides for a federal system of old-age, survivors, disability, and hospital insurance. The old-age, survivors, and disability insurance part is financed by the social security tax. The hospital insurance part is financed by the Medicare tax. Each of these taxes is reported separately.
[Last updated in August of 2020 by the Wex Definitions Team]