Calculating how much is owed in tax is a crucial part of the payroll process. The payroll department has to determine how much income tax to deduct from employee salaries and wages to work out the final net amount on each employee’s paycheck.
But in addition to income tax, there are other taxes levied on employees and employers. These additional levies are commonly referred to as ‘payroll taxes’. But what exactly is payroll tax? How is it different from income tax? And what charges and contributions fall into the payroll tax category?
The first thing to remember about payroll tax is that there is no standardized definition that is valid on an international level. Depending on which publication you consult or where in the world you are, a different definition may apply. In the United States, for instance, payroll taxes specifically refer to federal social security and medicare levies, hence taking on the form of a social security tax.
In many countries, however, the term ‘payroll taxes’ is used more loosely to refer to all types of taxes employers incur by employing and paying employees, hence including everything from social security contributions to unemployment insurance, sometimes even including employee income tax. Some countries have their own specific definition of payroll tax. One example is Australia where payroll tax is a specific tax levied on employers by the different states and territories.
The Organization for Economic Cooperation and Development has yet a different understanding of payroll taxes. According to the OECD, “[t]ax on payroll is defined as taxes paid by employers, employees or the self-employed, either as a proportion of payroll or as a fixed amount per person, and that do not confer entitlement to social benefits.” Some examples for payroll tax following this interpretation would be France’s social debt repayment contribution (CRDS).
In the broadest sense, payroll taxes can be defined as taxes which are levied on wages and salaries and which are paid by either the employee or the employer, or both.
In the U.S. as well as in many other countries, payroll tax and income tax are treated as two different concepts which differ with regard to two critical factors: one being by whom the tax is paid, and the other being what the collected tax money is used for.
Income tax on employment income is exclusively paid by the employee, while payroll taxes are paid by the employee as well as the employer—or, in cases like Australia, solely by the employer. Payroll taxes are used to fund specific social security programs (or other government-led schemes destined to improve the social welfare of employees). Money collected from federal, state and local income tax, on the other hand, is used for public services, infrastructure, and government spending in general.
Another difference between income tax and payroll tax that holds true for many countries are the tax rates. In many countries, payroll tax is levied at a fixed rate that applies to all employees and employers (except maybe for low-income earners who are often exempt), while income tax rates are usually progressive.
Having said that, there also are cases where income tax is considered a part of the overall payroll tax burden.
As we’ve seen, the use of the term ‘payroll tax’ differs from one country to the next, as do the specific payroll taxes which are levied on employees and employers. On the most general level, payroll tax can include any tax that is levied on an employee’s wages or salaries—which, in this sense, would make them the equivalent of statutory payroll deductions. Here’s a list of contributions and tax levies that can figure under the payroll tax umbrella:
Federal, state and local income tax
Unemployment tax
Health insurance contributions
Long-term care insurance contributions
Pension fund contributions
Workers’ compensation insurance levies
Disability insurance levies
Education levies
Church tax
Solidarity tax
Self-employment taxes
Payroll taxes are levied on income earned from employment, which means that employers have certain responsibilities towards making sure the adequate amount of tax is deducted from each employee’s pay and then remitted to the authorities in a timely manner. Except for a handful of countries, employers have to handle the following tasks when it comes to payroll taxes:
Calculating the employee share of the payroll taxes
Deducting the employee-paid payroll taxes from his or her salary/wages
Calculating and paying the employer share of the payroll tax levy
Remitting the amounts due to the authorities in charge
Reporting payroll taxes by submitting the necessary payroll tax declarations
So, to answer the question of who pays payroll tax: It’s the employer who pays payroll taxes on behalf of the employee. Usually, however, at least a part of this amount is deducted from the employee’s gross earnings.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
CONTRATA DONDE SEA
Contrata e incorpora empleados en el extranjero sin abrir entidades
Contrata, gestiona y paga a autónomos en todo el mundo
PAGA EN TODAS PARTES
Consolidación global de nóminas
Unifica las operaciones de nómina en todos tus países
Gestión de nóminas en varios países
Paga a tus empleados en otros países
HÁGASE SOCIO
Únase a la red Lano de socios locales de nómina
X
Hágase socio afiliado de Lano para empezar a ganar comisiones
Explora el ecosistema de integraciones y socios de Lano
Descubra cómo Lano puede ayudarle a crecer y pagar a su equipo internacional
EMPLEO GLOBAL
Contrata a los mejores talentos en cualquier lugar
Contrata empleados en países donde no tienes entidad jurídica
Prueba nuevos mercados sin el riesgo ni el coste de abrir entidades locales
Reubica y fideliza a tus empleados
Mantén el talento que se marcha a otros países
Convierte a los autónomos en empleados
Incorpora a los autonómos a tiempo completo de manera legal
NÓMINA GLOBAL
Gestiona las nóminas de todas tus entidades y proveedores en un único lugar
Implanta nóminas en nuevos países
Establece y gestiona nóminas en conformidad en cualquier país
Cambia los proveedores locales de nóminas
Sustituye a los proveedores de bajo rendimiento por partners de Lano
Realiza pagos transfronterizos
Paga a tus empleados en todo el mundo en moneda local
CASE STUDY
Descubre cómo PrestaShop se expandió en cuatro países en sólo seis meses con Lano
RECURSOS
Todo lo que necesitas saber para contratar en el mundo
Conoce las mejores prácticas para gestionar las nóminas de forma global
Todo lo que necesitas saber para contratar en el mundo
Compara los costes de pagar en todo el mundo con Lano
APRENDIZAJE
Aprende a utilizar y sacar el máximo partido a Lano
Mantente al día de las noticias, contenidos y mucho más de Lano
Explore nuestro glosario de términos de recursos humanos y de nómina
Learn all you need to know about global payroll and hiring
ACADEMIA
Conviértete en un experto en contratación global y nóminas
Gain insights into how much it costs to hire remotely in a country
Precios
CONTRATA DONDE SEA
PAGA EN TODAS PARTES
HÁGASE SOCIO
EMPLEO GLOBAL
NÓMINA GLOBAL
RECURSOS
Precios
English
Français
Deutsch
Español
© Lano Software GmbH 2024
English
Français
Deutsch
Español