You may have heard the terms “payroll tax” and “employment tax” used interchangeably. Many people–even some tax professionals!–think that these terms are synonyms. Granted, the terms do have their similarities. After all, they both refer to the taxes owed by an employer.
But the Internal Revenue Service actually considers each term different, and they both have distinct definitions. If you are an employer who will have to pay these taxes, it is important to know the similarities and differences between the two.
Understanding employment tax and payroll tax
“Employment tax” is a general term that for any taxes pertaining to employees. The IRS counts several different taxes in this category. Any taxes that an employer must pay are considered employment taxes. These include the taxes that an employer withholds from its employees’ paychecks such as federal and state income taxes, Social Security tax and Medicare tax. Other employment taxes include federal unemployment tax, self-employment tax and workers’ compensation payments.
The term “payroll tax” is much more specific. While employment tax refers to a catalog of employee-related taxes, payroll tax includes only the Social Security and Medicare taxes that an employer must withhold from its employees’ paychecks. So when the IRS refers to payroll taxes, it is referencing only the taxes reported on Form 941. (Even though federal income tax withholdings are also submitted on Form 941, they are not technically classified as payroll tax.)
Employment and payroll tax issues
Employers are responsible for knowing which taxes they must pay the IRS. But figuring out which taxes you owe and subsequently filing them can be a convoluted process for even the most experienced business owner. If you are an employer and tax issues arise, consider working with an experienced tax attorney. Tax attorneys can assist employers when it comes to complex tax issues, such as disputes regarding employment and payroll taxes.