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 Massachusetts, payroll taxes are similar to those at the federal level, with employers required to withhold a portion of an employee's earnings to cover federal obligations such as Social Security and Medicare, known as FICA taxes. These taxes are withheld up to a certain income threshold. Employers also withhold state income tax based on Massachusetts' tax rates and submit these funds to the state's Department of Revenue. While employers handle the withholding and remittance of payroll and income taxes, it is the employee's responsibility to ensure that their tax obligations are met by the tax filing deadline, typically April 15. If an employee has overpaid through withholding, they may be eligible for a refund. Self-employed individuals in Massachusetts must pay self-employment taxes, which serve a similar purpose to payroll taxes, covering their Social Security and Medicare contributions. These are typically paid through estimated tax payments throughout the year.