About Employer Payroll Contributions

Employers make payroll tax contributions with every paycheck that they send out. They withhold income tax along with a portion of social security and medicare payments. The IRS requires employers to include income in their reports that may not be listed on the paycheck, such as tips, and to pay its contributions for those as well.

Significance

Employer tax withholding has been standard practice since the implementation of the federal income tax. Withholding reduces the cost of tax collection for the IRS, as it turns every employer in the country into a deputy tax collector. All employers are required to send in the taxes collected at withholding. Failure to do so will leave the employer liable for owed back taxes, penalties and interest.

Function

Employers are required to contribute matching payments for state or municipal taxes. They can deduct most of the contributions that they make to their employee's taxes in their corporate tax return. They can deduct their contributions to social security and medicare from their income taxes.

Considerations

Many employees do not realize they may be liable for tax contributions that their employer fails to pay. To protect against this risk, employees should only work with reputable companies. If a company that you work for goes defunct without submitting their payroll contributions, consider hiring a tax lawyer to help you negotiate the amount that you'll need to pay.

Effects

Employer payroll contributions reduce tax paperwork that employees would otherwise have to complete for themselves. Employees defer their tax withholding if they have dependents, like children. This way, they can file their own taxes rather than have their employer do all the work. Even if an employee does not need to pay withholding taxes, the employer still needs to file his part of the payroll contributions.

Potential

Self-employed individuals must submit the portion of their taxes that would otherwise be paid by an employer. The cost of this is partly offset by tax deductions--they are allowed to deduct from their federal income taxes an amount identical to however much would be contributed by their employer if they were an ordinary employee. Those taxes are filed along with the personal return, and not separately.

Resources

• Payroll Tax Basics
• Employee Payroll Tax Information