Definition
Payroll tax is the set of taxes employers withhold from employee wages or pay on top of wages, including federal income tax withholding, Social Security and Medicare taxes, and unemployment taxes. Employers must calculate, deposit, and report these amounts to federal, state, and local agencies on a fixed schedule.
Also known as: payroll taxes, employment taxes, employment tax
How it works
Each pay period, the employer calculates withholding for federal income tax using the employee's Form W-4. Social Security and Medicare taxes are withheld from the employee and matched by the employer. For 2026, the IRS lists 6.2 percent for Social Security and 1.45 percent for Medicare as the rate for each of employee and employer, with Social Security applying to wages up to $184,500.
Employers also pay federal unemployment tax (FUTA) from their own funds, and withhold an Additional Medicare Tax of 0.9 percent on wages above $200,000, with no employer match. Federal deposits must be made electronically, on a monthly or semiweekly schedule. Employers report quarterly on Form 941 and annually on Form 940 and Form W-2. State and local taxes add further requirements.
Example
A bookkeeping firm pays an employee a monthly salary. It withholds income tax and the employee's share of Social Security and Medicare, adds the matching employer share, deposits the total electronically, and reports it on Form 941 each quarter.
How it differs from similar terms
Payroll Tax vs Independent Contractor. Employers withhold and pay payroll taxes for employees, but generally do not for independent contractors, who handle their own taxes. Misclassifying an employee as a contractor can create payroll tax liability.
Related terms and guides
Frequently asked questions
Which payroll taxes do employees pay and which do employers pay?
Employees bear federal income tax withholding, their share of Social Security and Medicare, and Additional Medicare Tax where it applies. Employers match Social Security and Medicare and pay FUTA from their own funds. Employees do not pay FUTA or have it withheld from their pay.
How do employers deposit and report payroll taxes?
The IRS requires federal tax deposits by electronic funds transfer, through channels such as EFTPS. Most employers file Form 941 quarterly, and Form 940 and W-2s annually. Deposit timing follows a monthly or semiweekly schedule, so payroll software or a provider often automates it.