These taxes generally fall into two categories:
- deductions from an employee’s wages, and
- taxes paid by the employer based on the employee’s wages.
The first kind are taxes that employers are required to withhold from employee’s wages, also known as withholding tax.
These taxes cover the advance payment of income tax, social security and medicare contributions, and various insurances, like unemployment and disability.
These taxes are paid to the federal and state taxing jurisdictions and are available as refunds.
Income taxes withheld from payroll are not final taxes, they are prepayments. Employees must still file income tax returns showing how much tax they actually owe after write-offs, in order to claim the amounts withheld as payments.
The second kind of payroll tax is a mandatory tax employers pay because they employ workers.
These taxes can be fixed or be proportionally linked to an employee’s pay.