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Payroll tax refers to any and all taxes withheld from an employee’s compensation. Payroll taxes include local, state, and federal income tax, social security tax, and medicare tax. While the employee is technically responsible for paying payroll taxes, the employer is most often the entity that withholds payroll taxes.
There are some pretax deductions that can be withheld from taxation. Some withholdings that occur before taxation include health insurance, life insurance and retirement plans. These pretax deductions will then reduce the overall amount of taxable income an individual has.
If an error is found on payroll taxes that lead to noncompliance with tax law, the IRS may assign fines to the offending party. However, if a company is found to have methodically and intentionally avoided payroll taxes through fraud or deception, then the IRS may pursue criminal penalties.
Some payroll taxes are constant and unchanging, such as the static 6.2% social security tax and the 1.45% medicare tax. Other taxes, such as state or federal income taxes are modified by the amount that an employee makes, with more financially wealthy individuals owing more in taxes.
The key taxes that must be paid by employers include social security tax, medicare tax, and income tax. Income taxes can be owed at the local, state, or federal level. Employers are required to withhold payroll taxes for their employees as well as assessing their own payroll tax burden.