Payroll Taxes

Payroll tax is money taken from your paycheck to fund a range of programs, including Social Security, healthcare, defense spending, government salaries, and workers’ compensation. Local governments may collect a small payroll tax to maintain and improve local infrastructure and services, including first responders, road maintenance, and parks. It’s separate from income tax and usually split between you and your employer.

In the U.S., payroll taxes go mainly to Social Security and Medicare. Both you and your employer pay 6.2% for Social Security (up to a yearly limit) and 1.45% for Medicare. If you earn over $200,000, you pay an extra 0.9% for Medicare. Employers also pay unemployment taxes.

In Canada, payroll taxes support the Canada Pension Plan (CPP) (or QPP in Quebec) and Employment Insurance (EI). You and your employer each pay 5.95% for CPP and around 1.66% for EI, with the employer contributing slightly more. Some provinces charge extra payroll taxes to employers for health or other services.

Payroll tax is money withheld from an employee’s wages, tips, and salaries – to fund government programs such as pensions, healthcare, and unemployment benefits. Employers are responsible for deducting this tax and contributing their own share before remitting it to the government.

For regular employees, this process is automatic. Your employer withholds your portion and adds their own, sending both to the tax authority. These deductions show up on your pay stub and vary depending on your income and location. Employers also pay unemployment taxes, which support benefits for people who lose their jobs.

Self-employed individuals, however, must handle both the employee and employer portions themselves. In the U.S., this is called the self-employment tax (currently 15.3% for Social Security and Medicare). In Canada, self-employed people pay both halves of CPP or QPP contributions but are exempt from Employment Insurance unless they opt in. They calculate and pay these amounts when filing their annual tax returns.

Everyone pays payroll tax – i.e., both employers and employees – pay payroll tax, though the split and structure vary by country and employment type.

In a typical job, employees have their share of payroll taxes automatically deducted from each paycheck. This covers contributions to programs like Social Security and Medicare in the U.S., or CPP/QPP and EI in Canada.

Employers are responsible for:

• Withholding the employee’s share,
• Paying an equal or greater share themselves, and
• Submitting the full amount to the government.

In the U.S., employers also pay unemployment taxes (FUTA and SUTA), which employees don’t. In Canada, both employers and employees contribute to Employment Insurance, though the employer pays a higher rate.

Self-employed individuals must pay both the employer and employee portions themselves, since there’s no one else to split the cost. These are typically settled when filing taxes annually.

Yes, failure to pay payroll taxes can lead to serious consequences, including criminal charges.

Governments treat payroll taxes as trust funds – money withheld from employees that must be remitted. In the U.S., knowingly failing to collect or send payroll taxes can trigger penalties under the IRS’s Trust Fund Recovery Penalty (TFRP), and in severe cases, criminal prosecution for tax evasion or fraud. Penalties can include fines and even prison time.

In Canada, similar rules apply. Employers who fail to remit payroll deductions (like CPP, EI, and income tax withholdings) may face civil penalties, interest, and in aggravated cases, criminal charges under the Income Tax Act or Employment Insurance Act.

So yes, if payroll tax non-compliance is willful, not just an honest mistake, it can cross the line into criminal territory.

Payroll tax in the United States includes both federal and state-level obligations. At the federal level, employers and employees each pay 6.2% toward Social Security on wages up to $168,600, and 1.45% toward Medicare with no income cap. Employees earning over $200,000 also pay an extra 0.9% in Medicare tax, which is not matched by employers. In addition, employers pay a federal unemployment tax (FUTA) of 6.0% on the first $7,000 of each employee’s wages, though most receive credits that reduce this to 0.6%.

At the state level, payroll tax obligations vary significantly, primarily through unemployment insurance (UI) taxes paid by employers. In California, employers pay State Unemployment Insurance (SUI) rates ranging from 1.5% to 6.2% on the first $7,000 of wages. Employees also contribute 0.9% toward State Disability Insurance (SDI), which is unique to California.

In Texas, there is no state income or disability tax, but employers pay SUI at rates between 0.31% and 6.31% on the first $9,000 of wages. Similarly, Florida imposes no state income tax and no additional payroll taxes on employees. Employers, however, must pay SUI ranging from 0.1% to 5.4% on the first $7,000 in wages. Overall, while federal payroll taxes are uniform, state-level obligations vary widely.

The total “payroll tax” amount in Canada depends on the province and the employee’s earnings.

In 2025, the Canada Pension Plan (CPP) rate is 5.95% from employee and 5.95% from employer (total 11.9%), on earnings between $3,500 and $68,500. While Employment Insurance (EI) is 1.66% from employee; employers pay 1.4 times that.

Also, some Canadian provinces have their own payroll taxes to fund specific programs.

In Ontario, employers pay an Employer Health Tax of 1.95% for payrolls over $1 million. Quebec has Quebec Pension Plan (QPP), Quebec Parental Insurance Plan (QPIP) and a Health Services Fund with rates from 1.65% to 4.26% based on payroll size and industry. Manitoba taxes 2.15% to 4.3% for employers with payrolls over $2.25 million. British Columbia taxes payrolls over $500,000 (tiered rates, top 1.95%) and in Newfoundland and Labrador, employers pay 2% on payrolls over $ 2 million.

These taxes do not apply federally and often exempt small businesses or apply reduced rates based on payroll thresholds. So while federal deductions are standard across Canada, total payroll tax obligations can vary significantly depending on the province and business size.

Calculating payroll tax involves adding up all required deductions and contributions based on an employee’s wages, both from the employee’s side (withheld from pay) and the employer’s side (paid directly by the business).

Step 1: Calculate Employee Deductions
Start with gross wages. Then subtract:

• Social Security (U.S.): 6.2% of wages up to the annual limit
• Medicare (U.S.): 1.45% of all wages, plus 0.9% on income over $200,000
• CPP/QPP (Canada): 5.95% (or Quebec’s QPP rate) on eligible earnings
• EI (Canada): 1.66% (or Quebec EI rate) on insurable earnings

These are withheld from the employee’s paycheck.

Step 2: Add Employer Contributions
Employers match Social Security, Medicare, and CPP/QPP amounts. In the U.S., they also pay FUTA and state unemployment taxes. In Canada, they pay a higher EI rate and, depending on the province, additional payroll levies (e.g., Ontario’s Employer Health Tax).

Step 3: Apply Wage Caps and Rates
Use the latest wage limits and contribution rates (which change yearly) for accurate results. The calculation may also vary if the employee is in a province or state with unique taxes.

For self-employed individuals, combine both the employee and employer shares. Additionally, Payroll software or professional payroll services are often used to handle these complex calculations accurately.

Payroll tax is used to fund essential government programs that provide financial support and social protection to workers and their families. It’s a key source of revenue for both federal and (in some cases) provincial or state governments.

In the U.S., payroll taxes primarily support Social Security and Medicare. These programs provide retirement income, disability benefits, and healthcare coverage for seniors. Employers also pay unemployment taxes, which fund unemployment insurance – a temporary income for workers who lose their jobs through no fault of their own.

In Canada, payroll taxes fund similar programs. Contributions go to the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), which provide retirement and disability benefits. Employment Insurance (EI) provides temporary income for job loss, maternity or parental leave, and sickness benefits. In some provinces, employer payroll taxes also help fund healthcare systems and education services.

In short, payroll taxes help sustain the social safety net, ensuring income security, health access, and job protection across society.

Payroll taxes are levied on employee wages and salaries, meaning any cash compensation paid for work performed. This includes hourly wages, salaries, bonuses, commissions, and most taxable benefits.

In both the U.S. and Canada, payroll taxes are calculated on gross earnings before income tax and other deductions. However, certain caps and exemptions apply depending on the specific tax. For example, U.S. Social Security tax applies only to wages up to a set annual limit, while Medicare tax applies to all earnings. Similarly, Canada’s CPP/QPP contributions and EI premiums have annual maximums.

Some non-cash benefits, like employer-provided housing or certain stock options, may also be subject to payroll taxes depending on local rules. Meanwhile, reimbursements, expense allowances, or non-taxable benefits (like certain health plans) are typically excluded.

In short, payroll taxes are levied on most forms of compensation that employees earn as a result of their work.

Payroll tax is due on a regular schedule, usually tied to how often a business pays its employees and how much total payroll tax it owes.

In the U.S., employers must deposit withheld payroll taxes (like Social Security, Medicare, and federal income tax) either semiweekly or monthly, depending on their payroll size. Federal unemployment taxes (FUTA) are usually due quarterly. Employers also need to file IRS Form 941 (quarterly) or 944 (annually, for small employers) to report these taxes.

In Canada, employers must remit payroll deductions (CPP/QPP, EI, and income tax) to the Canada Revenue Agency (CRA) on a monthly, semi-monthly, bi-weekly, or weekly basis, depending on their average monthly withholding. Larger employers must remit more frequently. Returns like the T4 slip and T4 summary are due by the end of February each year.

Deadlines vary by jurisdiction and payroll size, so businesses must track their remittance schedule carefully to avoid penalties.

Payroll tax pays for essential public programs that provide financial security, healthcare, and job protection for workers.

US: Payroll taxes in the United States primarily support these key social programs:

• Social Security: Funds retirement benefits, disability benefits, and survivor benefits.  
• Medicare: Helps pay for healthcare for seniors and certain disabled individuals.  
• Federal Unemployment Tax Act (FUTA) and State Unemployment Taxes: Provide benefits to workers who have lost their jobs through no fault of their own.  

Canada: Payroll taxes primarily fund the following crucial social safety net programs:  

• Canada Pension Plan (CPP) / Quebec Pension Plan (QPP): Provides retirement pensions, disability benefits, and survivor benefits.  
• Employment Insurance (EI): Offers temporary income support to unemployed workers, as well as maternity, parental, sickness, and caregiving benefits.  
• Provincial Payroll Taxes (where applicable, e.g., Ontario’s Employer Health Tax, Quebec’s Health Services Fund): Fund specific provincial programs, often related to healthcare.  

In short, payroll tax supports the social safety net – helping people through retirement, unemployment, illness, and life changes.

Payroll tax and income tax are both deductions from a worker’s earnings, but they serve different purposes and are calculated differently.

Payroll tax is used to fund specific social programs like Social Security and Medicare in the U.S., or CPP/QPP and Employment Insurance in Canada. It’s usually a fixed percentage of wages, split between the employer and employee, and applies only to employment income. Payroll taxes are mandatory and generally don’t vary based on your personal financial situation.

Income tax, on the other hand, goes to general government revenue and funds things like infrastructure, defense, education, and public services. It’s paid by individuals and businesses and is based on total income from all sources (not just wages). It’s progressive, meaning higher earners pay a higher rate, and it takes into account personal deductions, credits, and tax brackets.

In short:

• Payroll tax = flat-rate, employment-based, funds social programs
• Income tax = variable-rate, broader-based, funds general government operations

TaxLawyer.com connects individuals and businesses to highly skilled payroll tax attorneys with a proven track record of resolving complex payroll tax matters across the U.S. and Canada. From IRS trust fund recovery penalties to CRA enforcement actions, we provide the legal firepower needed to protect your finances, resolve disputes, and restore compliance.

Here’s how we help:

1. Resolve Payroll Tax Debt – We assist clients who’ve fallen behind on payroll tax payments, negotiating settlements, payment plans, or penalty relief with the IRS or CRA.
2. Defend Against Enforcement Actions – We represent businesses facing tax audits, wage garnishees, bank levies, or Trust Fund Recovery Penalty (TFRP) assessments.
3. Ensure Compliance – Our team helps set up or review payroll systems to ensure taxes are properly calculated, withheld, and remitted, minimizing future risk.
4. Worker Classification Advice – We advise on whether workers should be classified as employees or independent contractors, helping you avoid misclassification penalties.
5. Provincial/State Payroll Tax Guidance – We provide tailored advice for regional payroll tax obligations (e.g., EHT in Ontario or SUI in California and Texas).

From crisis resolution to compliance planning, TaxLawyer.com ensures your payroll tax responsibilities are handled efficiently and lawfully.

TaxLawyer.com proudly serves clients throughout the United States and Canada. Whether you need local insight or national expertise, our experienced payroll tax attorneys are ready to help – both in-person and through secure online consultations.

Wherever you’re located, we’ll connect you with legal tax professionals who understand your region’s tax laws and can guide you confidently through payroll tax issues, tax audits, disputes, and compliance challenges.

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