Employment Tax: A Complete Guide

It’s crucial for employers to understand the employee tax responsibilities they have. Employment tax is one of the most common costs businesses have to pay when hiring employees. So getting employment tax right is key to remaining compliant with local payroll laws and regulations.

In this guide, we’ll walk you through everything you need to know about employment taxes, including the different types, how to calculate them, and how they differ around the world.

What Is Employment Tax?

Employment taxes are the different types of taxes associated with employing an employee. We’ll cover the different types of employment taxes in more detail in the next section.

Employers must withhold specific amounts of money in accordance with local taxation laws. They typically deposit this money into a separate account and then pay the necessary tax authorities when it is time to do so. Employment tax differs based on local jurisdiction. Failure to withhold and deposit taxes can result in penalties for the employer.

Types of Employment Taxes

Here are some of the most common types of employment taxes.

Income Tax

Income tax is a type of employment tax paid exclusively by the employee to the taxing authority. However, in some countries, this tax is withheld and remitted by the employer on an employee’s behalf. In most locations worldwide, income tax rates are based on workers’ total annual earnings, either on a progressive scale or at a flat rate.

Employer Contributions

Employer contributions are taxes paid by employers for the benefit of the employee and wider social programs. Examples of this would be employer contributions to an employee’s retirement fund or to unemployment insurance. These are types of payroll taxes.

Employee Deductions

Employee deductions are wages that are withheld from each employee's total earnings. These deductions are typically used to pay for social security and benefits. Employee deductions are a broad term associated with all types of deductions made from the employee's wages to cover various types of employment taxes.

Employment Taxes Across the Globe

Employment taxes differ by country. Therefore, employers building global teams must fully understand their financial obligations across borders. The taxes vary for many reasons but are typically based on national and local laws and the types of services funded through those taxes.

In Sweden, for example, employers pay contributions at a rate of 31.42% of the employee’s salary. This goes towards health insurance, parental insurance, retirement funds, and more. In comparison, employment taxes in New Zealand are much lower at around 4% of the salary for employers.
Working with a global employment partner like Omnipresent can make it easy to pay remote workers and stay compliant with employment taxes no matter where your employees reside.

How to Calculate Employment Tax

Calculating employment taxes can be challenging. This is because tax rates vary significantly by country, and they may be different based on regional factors as well. For example, each state in the U.S. has its own tax rates or requirements. When calculating payroll, you can use an employment cost calculator to help you determine the rates for a specific jurisdiction.

Generally speaking, employment taxes are a percentage of the amount that the employee earns. However, the percentage differs from one location to the next.

Once you know how much you have to pay, the next step is to learn how to pay payroll taxes. These taxes are paid according to the schedule set by the taxing authority.

To help with the calculation of taxes related to payroll, many organizations use a payroll service or a global payroll provider, like Omnipresent.

Key Documents Required for Employment Tax

Collecting funds and paying taxes is not as simple as it may sound. It’s critical for organizations to maintain proper records and to report earnings in a manner that ensures each employee is paying their fair share of taxes under the rules of where they live. Employers must deposit taxes to the appropriate tax agency on the deadline set by that agency.  Again, the required documentation varies depending on location, so understanding these differing requirements if you have global employees is vital.

U.S. federal tax forms include form 941 (or form 944) to report federal tax withholding quarterly and form 940 to report federal unemployment annually. W2s are used to give the employee a record of all of their state and federal tax withholdings and are also filed to the Social Security Administration (SSA). The federal tax agency (the IRS) will reconcile the information they receive against the information the SSA receives and the information the states receive to confirm it matches. Employees also use the W2 Form to fill out their own personal income tax return.

In the U.K., employers need to register with HM Revenue and Customs (HMRC) to receive a PAYE reference number. Doing so allows employers to access their tax documents online and remit payments to their local tax collection agency. Employers must regularly submit Full Payment Submission (FPS) forms to the HMRC that report employee payments  and deductions.

Employment Tax FAQs

Here are some additional questions you might still have regarding employment taxes.

What Are Tax Returns?

A tax return is a document created to provide information to a taxing authority. This form typically reports income, expenses, and other tax information to the taxing authority. Tax returns are completed by both individuals and companies.. In both cases, tax returns help tax filers calculate the taxes they must pay.

What Are Employee Taxes?

Employee taxes are any taxes employees are responsible for paying (whether directly to tax authorities or via their employer). These taxes are often deducted from workers’ gross pay every pay period. Employee taxes typically include income taxes (both national and regional) and social security contributions, and rates differ from one country to the next.