Employee and Employer Payroll Taxes – What’s The Difference?

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Even though payroll taxes are paid by both employers and employees, there’s one major difference. Payroll taxes paid by employees affect employees’ net pay, but payroll taxes paid by employers don’t. Taxes that employees pay are subtracted out of an employee’s gross pay, which lowers the net pay for that paycheck. However, payroll taxes paid by the employers do not affect an employee’s paycheck. Below is a summary of the payroll taxes that employers and employees pay.

employer payroll taxes vs employee payroll taxes

Remember that payroll taxes are different from employment taxes, although there are some similarities. Employment taxes include Medicare, Social Security, FUTA, and federal income taxes as well as Additional Medicare Taxes for eligible employees (more on these below). Although some may come from an employee’s earnings, employers automatically withhold and submit them to the IRS on their behalf. Meanwhile, payroll taxes are those that are taken out from an employee’s paycheck and matched by their employer—and more specifically, Social Security and Medicare taxes. Long story short, all payroll taxes are employment taxes but not all employment taxes are considered payroll taxes. 

Employer tax payment and filing obligations for payroll

Every employer must pay their fair share of payroll taxes, as well as money they have withheld from their employees’ paychecks. Companies must deposit these withholdings plus their own tax contributions to the IRS on a monthly or semi-weekly basis. Although the schedule you follow will depend on the kind of business you have, you can find out your deposit schedule with IRS Publication 15. In addition to withholding and depositing payroll taxes, employers must file Form 941 every quarter. Every year, they must also file Form 940 and Form 945, as well as W-2’s for every employee. You may also need to deposit withholdings and file reports with your state and local government agencies, depending on their requirements.

Payroll tax penalties

Failure to file Form 941 or Form 944 (the Employer’s Annual Federal Tax Return) results in a penalty fee based on the amount you owe and how many days late the forms are submitted. Here is the breakdown on how the fees work:

 If you are: Penalty
 1-5 days late in filing the forms 2%
6-15 days late in filing the forms  5%
16 or more days late in filing the forms  10%
Within 10 days of receiving the first late notice from the IRS 10%
So late that over 10 days have passed since you received the first late notice from the IRS 15%

If you don’t pay your payroll taxes on time, you could be charged a trust fund recovery penalty (TFRP). So in addition to making good on your payroll taxes, you’d have to pay an TFRP equal to the amount you owe plus interest. It’ll be in your best interest to pay your payroll taxes on time.

Where to find payroll tax deductions on a pay-stub

Where to find payroll tax deductions on a pay-stub

Employees can typically find a breakdown of their payroll taxes in the Deductions section or the Taxes section of their pay stub. This breakdown will include the amount of money withheld for taxes from that pay period plus the amount that has been withheld for the year to date. In some cases, employer contributions for the pay period and the year may be included as well. 

Quick note: This should not be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance.

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Employee and Employer Payroll Taxes – What’s The Difference?