Payroll Tax

Payroll taxes are calculated as a percentage of earnings and are typically deducted automatically through the payroll system. They are separate from income tax, although both may appear on the same payslip.

Many systems split the cost between employer and employee. For example, under a hypothetical system where each side pays 7% of wages, an employee earning 50,000 would have 3,500 deducted, and the employer would pay a further 3,500 on top of the salary.

The name and structure vary by country. In the United States, payroll taxes fund Social Security and Medicare. In the United Kingdom, the equivalent is National Insurance contributions. Many other countries have social security contributions that work in a similar way. Some systems apply caps, so earnings above a certain level are not subject to all payroll taxes.

Payroll taxes affect the true cost of employing someone. A business must consider not only the salary but also the employer's share of payroll taxes when budgeting for staff. For employees, payroll contributions often build entitlement to future benefits, such as a state pension.