What is a Payroll Tax?

Definition: Payroll tax is a portion of an employee’s wages that is withheld for the purpose of complying with tax laws and contributing to social security and Medicare. In other words, it is the percentage of income an employee must pay to the government for its programs.

What Does Payroll Taxes Mean?

What is the definition of payroll taxes? Payroll taxes exist in most of the countries. The percentages charged will vary widely between countries and can be collected by different governmental levels depending on the country’s legislation. In some places there are federal payroll taxes, state payroll taxes, and even municipal payroll taxes. There are also many differences in the ways these taxes are collected.

In some countries, payroll taxes are entirely collected by employer’s deductions made to employees; this ensures periodical and timely payments to the government. In other places, the responsibility of paying payroll taxes is entirely handled to employees on an annual basis; and in some other cases a mix of these two methods is used.

To clarify this concept let’s look at the following example.


Luxury Shoes Co. is a US company that manufactures high quality, dress shoes for executives and business professionals. The US has a 15 percent payroll tax on all wages paid to employees. The company is required to pay half of this tax and withhold half of it from employees’ paychecks. The company is then required to remit the full tax, employer and employee portion, quarterly to the federal government.

Let’s assume Luxury Shoes has one employee with an annual salary of $100,000. LS would have pay $7,500 in taxes for this level of wages. It would also have to withhold $7,500 from the employee’s paychecks throughout the year. At the end of each quarter, LS would send a check to the federal government totaling $3,750. $1,875 would come from the company’s bank account and $1,850 would be withheld from the employee’s paycheck.

This is withheld amount is the difference between the employee’s gross pay and net pay.

Summary Definition

Define Payroll Taxes: Payroll tax means a tax leaved on an individuals wages and withheld from his or her paycheck.