Components of Payroll Tax

by Osmond Vitez, studioD
An itemized pay stub shows all of an employee's deductions for the pay period.


Comstock/Comstock/Getty Images

Payroll tax is the amount of money companies must withhold from an employee&amp;rsquo;s paycheck per government regulations. The Internal Revenue Service is the government agency responsible for providing businesses with information relating to federal payroll taxes. Individual states may also assess income taxes relating to individual employee income. Payroll must be withheld from all employees directly employed by a company. Businesses who fail to withhold or properly manage their employee&amp;rsquo;s payroll taxes may be subject to severe IRS penalties.

Federal Income Tax

The Federal income tax withheld from an employee&amp;rsquo;s paycheck represents the amount of money owed to the U.S. Federal government. IRS Publication 15, also known as the Employer&amp;rsquo;s Tax Guide Circular E, contains information relating to an individual employees FIT withholding. Individual FIT withholding relates to the pay frequency, such as monthly, semi-monthly or weekly, and the amount of deductions an individual claims on their W-4 form. FIT withholding is also affected by persons filing status, such as single person, married or head of household.

Social Security

Social Security represents several federal withholding social programs, such as old age, survivors and disability insurance, unemployment benefits, needy family assistance and other federal programs. Employers must withhold half of the Social Security tax from the employee paychecks and pay the other half from business revenue. As of 2010, the Social Security payroll tax is 12.4 percent, with a base wage limit of $106,800. Employers must withhold 6.2 percent Social Security payroll tax from an employee&amp;rsquo;s pay check up to the $106,800 limit.


Medicare is a social insurance program providing health insurance benefits to individuals age 65 and older. Medicare is run by the U.S. government and is a single-payer health care system. As of 2010, the Medicare payroll tax rate is 2.9 percent, with 1.45 percent withheld from employee paychecks and the other half paid by the business. Medicare does not have a wage base limit and is applicable to all employee wages.

State Income

Texas is one of the few states that do not impose a state income tax on its citizens. State income taxes works similar to the federal income tax payroll withholding. States apply a certain tax rate percentage to employee wages based on expected income levels, filing status and deductions. Businesses are required to file this information with the state&amp;rsquo;s payroll regulatory board. This deduction is removed from the employee&amp;rsquo;s paycheck and remitted to the state tax authority.

About the Author


Photo Credits

  • Comstock/Comstock/Getty Images
Suggest an Article Correction