Accounting technology / Glossary / Payroll tax

What is payroll tax?

Definition

Payroll tax is the tax collected through payroll: amounts withheld from employees' pay, such as income tax and the employee share of social security, and taxes employers pay on top of wages, such as the employer share of social security and unemployment taxes. Employers calculate, withhold, pay and report them each pay period.

Also calledemployment taxespayroll taxesemployer taxes

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US Social Security: 6.2% each, to $184,500 (2026)
US Medicare: 1.45% each, no cap
UK employer NI: 15% above £5,000 a year

How payroll taxes work in the US and the UK

In the US, employers withhold federal income tax and the employee share of FICA: Social Security at 6.2% on wages up to the annual wage base, $184,500 in 2026, and Medicare at 1.45% on all wages. Employers pay the same 6.2% and 1.45% again, plus federal unemployment tax at 6.0% on the first $7,000 of each employee's wages, reduced by up to 5.4% of credit for state unemployment tax paid; state income and unemployment taxes come on top. In the UK, employers deduct income tax and employee National Insurance through PAYE and pay employer National Insurance at 15% on earnings above £5,000 a year, with an Employment Allowance of up to £10,500 for eligible employers in 2026 to 2027. EU countries set their own employer social contributions. Payroll platforms such as Gusto, Rippling, Warp and PayFit calculate the taxes and file the returns.

Common questions

What is the difference between payroll tax and income tax?+

Income tax is a tax on the employee's income; payroll is just how it is collected for employees. Payroll taxes also include social security and unemployment taxes, part of which the employer pays itself on top of wages.

Who pays payroll taxes, the employer or the employee?+

Both. Employees bear income tax and their share of social security through withholding. Employers pay their share of social security and unemployment taxes as an extra cost of employment.

What happens if payroll taxes are paid late?+

Tax authorities charge penalties and interest. In the US, unpaid withheld taxes can be collected personally from the people responsible for paying them, so payroll tax deposits are treated as a priority.