What are Federal Payroll Taxes?

Federal payroll taxes are taxes that are imposed by a federal government on transactions between an employer and employees, usually in regular wage payment situations referred to as “payroll.” Each country has its own rules on federal payroll taxes, and rates of taxation within a general income tax system. Evaluating federal payroll taxes is one way to determine how much citizens of a particular country are taxed on their conventional income.

Just as federal payroll tax rates vary around the world, so do the mechanisms for collecting these taxes, and the various forms that tax amounts take. For example, in the United States, federal payroll taxes make up a significant part of the average paycheck, but consist of different portions that, while not earmarked for specific spending at a government level, are nonetheless identified by the programs they were intended to support. The greater amount of federal taxes within the U.S. system consists of payments toward the Social Security and Medicare entitlement programs that support the aging population.

In general, finance professionals identify two main types of payroll taxes. One is a withholding tax that employees pay out of their paychecks. Employers have a responsibility to put the money aside from the paycheck, and send it to the government. Then, employees can file for a tax return if they have not been levied with the withheld amount. The other main type of payroll tax is a tax paid directly to the governments by employers.

Although the majority of countries have payroll taxes, tax rates vary quite a bit. For instance, China, in many ways the largest nation in the world, has one of the lowest employee taxation rates. Companies often evaluate federal payroll taxes in deciding where to place critical parts of a business structure, from a headquarters to a facility that employs many workers. In addition, multinational businesses can often get tax relief by finding ways around domestic taxation.

In some countries, consumer advocates are arguing that tax codes are unfair or complicated. There could also be criticisms of various national tax systems related to the changes that globalization has brought to both global and domestic markets. Economists can take note of how proposed or implemented changes for federal payroll taxes in various countries shape the economic outcomes for those nations in future years.