Tax an employer withholds or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax.
Payroll tax generally refers to two kinds of taxes: Taxes which employers are required to withhold from employees' pay, also known as withholding tax, and taxes which are paid from the employer's own funds and which are directly related to employing a worker, which may be either fixed charges or proportionally linked to an employee's pay.
Employers report payroll by calculating gross pay and various payroll deductions to arrive at net pay. Calculating various payroll deductions requires that the payroll accountant be detail-oriented and work with extreme accuracy.
Basic Formula for Net Pay:
Employee's gross pay (pay rate times number of hours worked)
minus Statutory payroll tax deductions
minus Voluntary payroll deductions
equals Net Pay.
Governments use revenues from payroll taxes to fund such programs as Social Security, healthcare, unemployment compensation, worker's compensation and sometimes local governments even require a small tax to maintain and improve local transportation.
