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 Michigan, payroll taxes consist of federal and state components. Federal payroll taxes, which include Social Security and Medicare taxes, are governed by the Federal Insurance Contributions Act (FICA). Employers in Michigan are required to withhold these taxes from their employees' wages and remit them to the IRS. The Social Security tax has an income cap, beyond which no tax is levied, while Medicare tax applies to all earnings. Employers also withhold federal income tax based on IRS withholding tables and employees must settle any outstanding tax liability by April 15. Michigan also imposes a state income tax, which employers are responsible for withholding from employees' wages and paying to the Michigan Department of Treasury. Self-employed individuals in Michigan must pay self-employment taxes, which cover their Social Security and Medicare contributions, and may be required to make estimated tax payments for their state income tax liability throughout the year.