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Payroll tax

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Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG). The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.

In the United States

In the United States, payroll taxes are assessed by the federal government, all fifty states, the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases and are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.[1]

Income tax withholding

Main article: Tax withholding in the United States

Federal, state, and local withholding taxes are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions.[2] Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4.[3] Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.[4]

Social Security and Medicare taxes

Main article: Federal Insurance Contributions Act tax

Federal social insurance taxes are imposed equally on employers[5] and employees.[6], consisting of a tax of 6.2% of wages up to an annual wage maximum ($106,800 in 2010) plus a tax of 1.45% of total wages.[7] To the extent an employee's portion of the 6.2% tax exceeded the maximum by reason of multiple employers, the employee is entitled to a refundable tax credit upon filing an income tax return for the year.[8]

Unemployment taxes

Main article: Federal Unemployment Tax Act

Employers are subject to unemployment taxes by the federal[9] and all state governments. The tax is a percentage of taxable wages[10] with a cap. The tax rate and cap vary by jurisdiction and by employer's industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000.[11] Some states also impose unemployment, disability insurance, or similar taxes on employees.[12]

Reporting and payment

Employers must report payroll taxes to the appropriate taxing jurisdiction in the manner each jurisdiction provides. Quarterly reporting of aggregate income tax withholding and Social Security taxes is required in most jurisdictions.[13] Employers must file reports of aggregate unemployment tax quarterly and annually with each applicable state, and annually at the Federal level.[14] Each employer is required to provide each employee an annual report on IRS Form W-2[15] of wages paid and Federal, state and local taxes withheld, with a copy must to the IRS and many states. These are due by January 31 and February 28 (March 31 if filed electronically), respectively, following the calendar year in which wages are paid. The Form W-2 constitutes proof of payment of tax for the employee.[16]

Employers are required to pay payroll taxes to the taxing jurisdiction under varying rules, in many cases within 1 banking day. Payment of Federal and many state payroll taxes is required to be made by electronic funds transfer if certain dollar thresholds are met, or by deposit with a bank for the benefit of the taxing jurisdiction.[17]

Penalties

Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%.[18] Similar state and local penalties apply. Failure to properly file monthly or quarterly returns may result in additional penalties. Failure to file Forms W-2 results in an automatic penalty of up to $50 per form not timely filed.[19] State and local penalties vary by jurisdiction.

A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS. The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.[20]

Other nations

Australia

The Australian federal government (ATO) requires withholding tax on employment income (payroll taxes of the first type), under a system known as pay-as-you-go (PAYG).

The individual states impose payroll taxes of the second type.

See also: Taxation in Australia § Payroll taxes

Bermuda

In Bermuda, payroll tax accounts for over a third of the annual national budget, making it the primary source of government revenue.[21] The tax is paid by employers based on the total remuneration (salary and benefits) paid to all employees, at a standard rate of 14% (though, under certain circumstances, can be as low as 4.75%). Employers are allowed to deduct a small percentage of an employee's pay (around 4%).[22] Another tax, social insurance, is withheld by the employer.

Brazil

In Brazil employers are required to withhold 11% of the employee's wages for Social Security and a certain percentage as Income Tax (according to the applicable tax bracket). The employer is required to contribute an additional 20% of the total payroll value to the Social Security system. Depending on the company's main activity, the employer must also contribute to federally-funded insurance and educational programs. There is also a required deposit of 8% of the employee's wages into a bank account that can be withdrawn only when the employee is fired, or under certain other extraordinary circumstances (called a "Security Fund for Duration of Employment"). All these contributions amount to a total tax burden of almost 40% of the payroll for the employer and 15% of the employee's wages.

Canada

The Northwest Territories in Canada applies a payroll tax of 2% to all employees. It is an example of the second type of payroll tax, but unlike in other jurisdictions it is paid directly by employees rather than employers. Unlike the first type of payroll tax as it is applied in Canada, though, there is no basic personal exemption below which employees are not required to pay the tax.[23] Ontario applies a health premium tax to all payrolls on a sliding scale up to $900 per year.[24]

China

In the China, the payroll tax is a specific tax which is paid to states and territories by employers, not by employees. The tax is not deducted from the worker's pay. The Chinese Government itself requires only one tax to be withheld from paychecks: the PAYG (or pay-as-you-go) tax, which includes medicare levies.

Croatia

In Croatia, the payroll tax is composed of several items:

  • national tax on personal income (Croatian: porez na dohodak), which is applied incrementally with rates of 0% (personal exemption), 15%, 25%, 35%, 45%
  • optional local surcharge on personal income (Croatian: prirez), which is applied by some cities and municipalities on the amount of national tax, currently up to 18% (in Zagreb)
  • pension insurance (Croatian: mirovinsko osiguranje), universal 20%, for some people divided into two different funds, one of which is government-management (15%) and the other is a selected pension fund (5%)
  • health and unemployment insurance (Croatian: zdravstveno osiguranje), divided into 15% for general health insurance, 0.5% for work-related accident insurance, and 1.7% for unemployment insurance

Hong Kong

In Hong Kong, salary tax is capped at 16%.[25] Depending on income, employers fall into different tax brackets.[25]

Sweden

In 2010 the statutory Swedish payroll tax is 31.42 percent for the majority of employees.[26] In addition, employers often pay 5 to 15 percent in fees to social insurances according to agreements between employers and the union. These additional charges are not taxes, and are not paid to the Swedish state.

United Kingdom

In the United Kingdom, pay as you earn (PAYE) income tax and Employees' National Insurance contributions are examples of the first kind of payroll tax, while Employers' National Insurance contributions are an example of the second kind of payroll tax.

References

  1. ^ A tutuorial is available online from the Internal Revenue Service (IRS) explaining various aspects of employer compliance, see Video Tutorial.
  2. ^ The determination of whether a person performing services is an employee subject to payroll tax or an independent contractor who self assesses tax is based on 20 factors. See IRS Publication 15 and the tutorial referenced above. For Federal requirements, see 26 USC 3401-3405.
  3. ^ IRS Form W-4
  4. ^ 26 USC 31.
  5. ^ 26 USC 3111
  6. ^ 26 USC 3101.
  7. ^ Note that an equivalent Self Employment Tax is imposed on self employed persons, including independent contractors, under 26 USC 1401. Wages and self employment income subject to these taxes are defined at 26 USC 3121 and 26 USC 1402 respectively.
  8. ^ 26 USC 31(b) and 26 USC 6413(c).
  9. ^ 26 USC 3301.
  10. ^ As defined in 26 USC 3306(b).
  11. ^ State tax rates and caps vary. For example, Texas imposes up to 8.6% tax on the first $9,000 of wages ($774), while New Jersey imposes 3.2% tax on the first $28,900 for wages ($924). Federal tax of 6.2% less a credit for state taxes limited to 5.4% applies to the first $7,000 of wages (net $56).
  12. ^ See, e.g., New Jersey.
  13. ^ See, e.g., IRS Form 941. Electronic filing may be required.
  14. ^ See, e.g., IRS Form 940.
  15. ^ IRS Form W-2
  16. ^ See IRS Form W-2 Instructions. Note that some states and cities obtain their W-2 information from the IRS and from taxpayers directly.
  17. ^ See 26 USC 6302 and IRS Publication 15 for Federal requirements. EFT is required for Federal payments if aggregate Federal tax payments, including corporate income tax and payroll taxes, exceeded $200,000 in the preceding year. See, e.g., NJ Income Tax - Reporting and Remitting, New Jersey requirements for weekly EFT payment where prior year payroll taxes exceeded $10,000.
  18. ^ 26 USC 6656.
  19. ^ 26 USC 6721.
  20. ^ 26 USC 6672.
  21. ^ Bermuda Government Budget Statement 2009
  22. ^ Bermuda Government Payroll Tax Guide
  23. ^ Government of the Northwest Territories Finance Department Payroll Tax Information Page
  24. ^ Ontario Health Premium Rate Chart
  25. ^ a b "Tax Computation of Salaries Tax and Personal Assessment". Hong Kong Government. 2010. Retrieved 22 November 2010. {{cite web}}: Unknown parameter |month= ignored (help)
  26. ^ Ekonomifakta: Sociala avgifter, läst 12 februari 2010
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