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 Indiana, payroll taxes consist of amounts withheld from an employee's wages by the employer to pay federal and sometimes state government obligations on behalf of the employee. Federal payroll taxes include contributions to Medicare and Social Security, known as Federal Insurance Contributions Act (FICA) taxes, and are indicated on pay stubs as MedFICA and FICA. These taxes are subject to an income cap, beyond which no payroll taxes are levied. While employers are responsible for withholding and remitting payroll taxes, employees are responsible for their own income taxes. Employers withhold a portion of wages based on federal withholding tables and submit these funds to the U.S. Treasury. Employees must ensure they pay any additional income tax due by April 15 or claim a refund if they have overpaid. Indiana also imposes a state income tax, which employers may withhold and remit to the state treasury. Self-employed individuals in Indiana must pay self-employment taxes, which serve a similar purpose to payroll taxes for employees.