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 Kentucky, payroll taxes consist of federal and state components. Federal payroll taxes, which include Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA), are withheld by employers from their employees' wages and paid to the Internal Revenue Service (IRS). These taxes fund specific government programs and are subject to an income cap beyond which no taxes are levied. Employers are responsible for withholding the correct amount of federal payroll taxes and for paying their portion of these taxes. Income taxes, on the other hand, are the responsibility of the employee, although employers do withhold a portion based on federal withholding tables and submit it to the U.S. Treasury. Employees must ensure they pay any additional income tax due by April 15 or file for a refund if they have overpaid. Kentucky also imposes a state income tax, which employers are generally required to withhold from employees' wages and remit to the Kentucky Department of Revenue. Self-employed individuals in Kentucky must pay self-employment taxes, which serve as their contribution to Social Security and Medicare, and may also need to pay estimated state income taxes quarterly.