What's the Difference Between Payroll Taxes and Employment Taxes?
Tax websites and books toss around these two terms - payroll taxes and employment taxes - as if they were equal, but they are not. Yes, they are close enough in meaning to cause confusion, but they are different things.This article takes apart these definitions as an attempt to clarify the differences.
Some experts use the term "payroll taxes" generically, but this means something specific to the IRS, as does the term "employment taxes." It's generally a good idea to follow the exact IRS definition when reporting or filing taxes.
Under the American Recovery and Reinvestment Act of 2009 (ARRA), employers are allowed a credit against “payroll taxes” (referred to in this publication as “employment taxes”) for providing COBRA premium assistance to assistance eligible individuals.
What are Employment Taxes?
The IRS uses the term "employment taxes" to refer to a laundry list of taxes that relate to employees. The IRS list of "employment taxes," refers to:
- The federal income tax withheld from employee pay and paid to the IRS
- Social Security and Medicare taxes (called "FICA taxes") withheld from employee pay and paid to the IRS.
- The Additional Medicare tax imposed on higher-earning employees.
- Federal unemployment taxes (FUTA tax) paid by employers based on number of employees and unemployment rates.
- Self-employment taxes, which are the Social Security and Medicare taxes paid by self-employed business owners.
All of these taxes (except self-employment tax) must be paid by employers, either through withholding or by direct payment, or both. In addition, one other tax might be considered as part of the "employment tax" family of taxes, specifically worker's compensation payments, which are run by the states.
What are Payroll Taxes?
For this term, the IRS is more specific. By "payroll taxes" the IRS means only Social Security and Medicare taxes withheld from employee pay and matched by employers. In this terminology, federal income tax withholding, while submitted on the 941 form, is not part of payroll taxes.
But, when I went to an IRS page with a glossary and looked up "payroll taxes," I was directed to an article that discussed "FTDs" - Federal Tax Deposits. In the article, the IRS discusses withholding for both FICA taxes and federal income tax, and Form 941, the employer's quarterly tax return. This form requires information on federal income tax withholding, FICA withholding, and the amount the employer owes for its portion of FICA taxes.
Why The Terms Matter
So, what's the big deal with trying to keep the terms "employment taxes" and "payroll taxes" separate and distinct?
Basically, you need to know what tax you have to pay, on what form. As I mentioned above, it appears that the IRS seldom uses the term "payroll taxes" except when it applies to Form 941, then only directly.
In conclusion, 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.
What Taxes Relating to Employees Must I Pay?
Instead of worrying about the terms "payroll taxes" and "employment taxes," just take a look at this list of taxes that you must pay if you have employees. Some of these taxes are withheld from employee pay, while others are paid 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
- Pay federal and state unemployment taxes, based on the number of employees
- Pay worker's compensation fees (taxes) to state or federal agencies.