A payroll tax is a percentage of the employee’s wages, salaries, and tips withheld by the employer and paid to the government on behalf of the employee. For example, federal payroll taxes are deducted from the employee’s earnings and paid to the Internal Revenue Service (IRS).

Payroll taxes are designated to fund specific government programs and income taxes are paid to the U.S. (or state) treasury for general expenses. For example, federal payroll taxes are deducted to fund Medicare and Social Security programs; are known as Federal Insurance Contributions Act (FICA) taxes; and are labeled as MedFICA and FICA on employee pay stubs. Payroll taxes are levied only up to a certain income level, and any income above that level is not subject to payroll taxes.

Although the employer is responsible for payment of payroll taxes, income tax is the employee’s responsibility. For federal income taxes the employer will typically withhold a percentage of the employee’s wages based on the federal withholding table and submit the funds withheld to the U.S. treasury—but it is the employee’s responsibility to pay any additional income tax due by the April 15 deadline—or to seek a refund if the amounts withheld by the employer are more than the employee owes. Most states and some cities and counties also impose income taxes—much of which may be withheld by the employer and paid to state, city, or county treasury.

Self-employed persons are also required to remit payroll taxes, and these are referred to as self-employment taxes.

In Illinois, payroll taxes consist of amounts withheld from an employee's wages by the employer to pay for federal and state government programs. Federal payroll taxes, which include contributions to Medicare and Social Security, are governed by the Federal Insurance Contributions Act (FICA) and are noted as MedFICA and FICA on pay stubs. These taxes are only levied up to a certain income threshold. Employers are responsible for withholding the correct amount of payroll taxes and remitting them to the IRS. Income taxes, on the other hand, are the employee's responsibility, although employers withhold a portion based on federal tables and submit it to the U.S. Treasury. Employees must ensure they pay any additional income tax due by April 15 or claim a refund if over-withheld. Illinois also imposes a state income tax, which employers generally withhold and remit to the state treasury. Self-employed individuals in Illinois must pay self-employment taxes, which serve a similar purpose to payroll taxes for employees.