Payroll Tax

What are Payroll Taxes?

Payroll taxes are the statutory deductions made by the employer from an employee’s periodic salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. In the majority of the countries, these taxes are collected by tax authorities from respective employers and paid to the central government’s treasury for human welfare schemes, infrastructure development, etc.

The primary payroll taxes in the UK, USA are social security, national insurance/medicare, and self-employment income taxes.



Components are discussed below:


#1 – Social Security Tax

Social security tax is deducted from an employee’s salary or wages, and the employer is also required to pay a social security tax, which means the employer is responsible for submitting to the government both the employee and the employer contribution of the social security tax. As a result, the social security tax is both an employee allowable deduction and an employer’s expense.

Social security taxes are levied at a fixed percentage up to a particular income limit only. These taxes take care of retirement benefits, disability, and various other citizen benefits in American and European countries.

#2 – National Insurance Tax

National insurance tax is also withheld from an employee’s salary or wages, and the employer is also required to pay a class 1 and class 2 national insurance payroll taxes. In other words, the employer is responsible for remitting to the government both the employee and the employer portions of the national insurance taxes. The employer can claim the deduction of these expenses in their tax returns and is an allowable expenditure for tax purposes. To understand about national insurance payroll deductions in the UK let’s understand an example;

Gemma works for black plc. She is paid £48,000 in 2018/19. We need to calculate gemma’s national insurance employee and employer contribution.

Employee’s Contribution:

  • £(45,000-8,164)= £36,836 x 12% (main) = £4,420
  • £(48,000-45,000)= £3,000 x 2% (additional)= £60
  • Total Employee Contribution = £4,480

Employer’s Contribution:

  • £(48,000-8,164)= £39,836 x 13.8% = £5,497

#3 – Regular Income Tax

These are the regular monthly tax withholdings from an employee’s salary or wages monthly as per the tax laws stipulated by the federal government. These are calculated at the start of the year and periodically deducted so that employees don’t feel the burden at year-end by paying the accumulated taxes and can also claim if paid in excess. While calculating these taxes, all deductions and allowances are taken care of as per the declaration by the employee at the start of the year. These ensure regular revenue to the government periodically and lesser tax evasion.


Some of the advantages are as follows:

  • They apply to all wages and salaries up to a capping of a certain amount where the majority of people’s income falls under. Also, unlike the personal income tax, payroll taxes do not include any deductions, exemptions, and credits that narrow the tax base. It means that these taxes can raise a large amount of revenue without major investment and hassles, which ultimately concludes that they are broad in nature.
  • These taxes in most of the countries are collected at source from employee’s salaries regularly, considering the employee declaration of income and investments during the year. It eliminates unnecessary documentation at the time filling of employee returns and saves time for both the tax authorities and the assessee. Through this process, an employee can claim the excess payroll tax paid as a refund through his return to the government.
  • They are very difficult to evade because all these deductions are made at source and upfront from an employee’s salary or wages at a fixed percentage and submitted to the federal government with proper record maintenance.

Problem Areas and Potential Resolutions


Payroll Tax on employers does an excellent job when it comes to collecting handsome revenue for the federal government, which is the primary objective of any kind of taxes and eliminate fiscal deficits as well. It is regressive in most of the countries and applies at a fixed percentage up to a particular income capping. Still, this regressivity can be severely by introducing alternative taxes which doesn’t take into account any kind of income capping and provide a steady amount of revenue as well to the federal government.

However, as is the case with almost the complete tax system in all major countries, there is still some room for improvement.

This article has been a guide to what payroll taxes are, and it’s a definition. Here we discuss the components and advantages of payroll tax on employers along with a detailed explanation. You can learn more about accounting from the following articles –

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