What's the Difference Between Payroll Taxes and Employment Taxes?
These taxes overlap but are technically different
Tax websites and books use the terms "payroll taxes" and "employment taxes" as though they're interchangeable, and they do overlap to some extent. They're marginally different types of taxes, however.
What are Employment Taxes?
The Internal Revenue Service uses the term "employment taxes" to refer to a whole laundry list of taxes that relate to employees. The list includes IRS federal income taxes withheld from employee pay and paid to the IRS on the employee's behalf, as well as Social Security and Medicare taxes—called "FICA taxes". These taxes are also withheld from employee pay and paid to the IRS.
The additional Medicare tax imposed on higher-earning employees is an employment tax, too, as are federal unemployment taxes (FUTA). Unemployment taxes are paid by employers based on the number of employees they have and unemployment rates.
Self-employment taxes are the Social Security and Medicare taxes paid by self-employed business owners, and these are considered employment taxes as well.
Worker's compensation fees are also an employment tax. These programs are run by the states.
Other than the self-employment tax, all these taxes must be paid by employers, either through withholding from an employees' pay, by direct payment, or both. The same rules apply to all employees whether they're full or part-time or temporary workers.
What Are Payroll Taxes?
This is where the issue becomes murky. Technically, payroll taxes are the Social Security and Medicare taxes withheld from employees' pay and matched by employers...but these taxes are also considered to be employment taxes.
But the IRS seldom uses the term "payroll taxes" except when it applies to Form 941, the employer's quarterly tax return.
Why the Terms Matter
Think of the term "employment taxes" as encompassing all the taxes employers must pay if they have employees, and payroll taxes as only those taxes related to Form 941. The IRS addresses withholding for both FICA taxes and federal income tax on Form 941. This form requires information on federal income tax withholding, FICA withholding, and the amount the employer owes for its portion of FICA taxes.
As a business owner, you have to know what taxes you must pay, and what form you must submit. Take a look at this list of taxes that you must pay if you have employees. Some of these are withheld from employee pay, while others are paid solely by you as the employer.
- Withhold federal income taxes from employee pay.
- Withhold FICA taxes from employee pay and pay those taxes plus an equal amount from your business.
- Withhold state income taxes from employee pay.
- Withhold the additional Medicare tax of .9 percent of an employee's earnings over certain thresholds. As of 2018, these thresholds are $200,000 for single employees and $250,000 for married taxpayers who file joint returns with their spouses.
- Pay federal and state unemployment taxes, based on the number of employees you have. You must pay FUTA. Your employees do not contribute to this tax.
- Pay worker's compensation fees to state or federal agencies.
- File Form 941 quarterly.
You're not quite done yet. You're also legally obligated to place your withholdings on deposit, and the rules for this can vary depending on the exact nature of your business and how much you withhold.
The regularity of deposits can depend on state, federal, or even local law, so check with your tax professional to make sure you get it right. They might have to be made quarterly or even daily. The IRS should formally advise you of federal deadlines for the coming year sometime in December.