What's the Difference Between Payroll Taxes and Employment Taxes?
These taxes overlap but are technically different
The terms payroll taxes and employment taxes are often used to refer to the same concept of taxes from earnings. Essentially, they are the same but differ in one detail.
Employment taxes are paid to the IRS directly from the employer. These are federal income tax, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes. Payroll taxes are social security and medicare contributions but are only defined as payroll taxes on IRS Form 941, the Employer's Quarterly Federal Tax Return.
The Internal Revenue Service uses the term employment taxes to refer to a 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. Federal Insurance Contribution Act (FICA) taxes—Social Security and Medicare—are also withheld from employee pay and paid to the IRS.
The additional Medicare tax imposed on higher-earning employees is an employment tax. This is in addition to the usual Medicare contributions. The only caveat is that employers are not responsible for the tax if the employee is paying it. If the employee is paying the additional Medicare tax, the IRS requires that Forms 4669 and 4670 be filed.
FUTA taxes are paid by employers based on the number of employees they have and unemployment rates.
These taxes must be paid by employers, either through withholding from an employees' pay, by direct payment, or both. If you are self-employed, you must pay these taxes. All employees, whether they're full-time, part-time or temporary require their taxes to be paid for them through withholding.
Technically, payroll taxes are Social Security and Medicare taxes withheld from employees' pay and matched by employers—but these taxes are considered to be employment taxes.
The IRS seldom uses the term payroll taxes except when it applies to Form 941, the Employer's Quarterly Tax Return. This form should be filed once a quarter with the IRS to report the taxes you have been withholding.
Employment taxes encompass all taxes employers must pay if they have employees, and payroll taxes are those taxes related to Form 941. The IRS addresses withholding for both FICA (Federal Income Contributions Act) taxes and federal income tax in this form.
As an employer, you are obligated to:
- 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 percentage of an employee's earnings over certain thresholds. These thresholds are different for single employees, married employees filing separately, and married taxpayers who file joint returns with their spouses
- Pay federal and state unemployment taxes, based on the number of employees you have. Employers must pay FUTA (Federal Unemployment Tax Act) taxes.
- Pay worker's compensation fees to state or federal agencies
- File Form 941 quarterly
You should also place your withholding on deposit (you are legally obligated to). The rules for depositing can vary depending on the nature of your business and how much you withhold. The IRS requires that you deposit either monthly or semi-weekly.
Monthly deposits are due by the 15th of the following month, and semi-weekly deposits are due on by the Wednesday following a Wednesday, Thursday or Friday payment. If you paid your employees on Saturday, Sunday, Monday or Tuesday, deposits must be made by the following Friday.
The regularity of state and local deposits can depend on the laws where you are reporting.