Final answer:
Payroll taxes withheld are considered a liability for employers until they remit these funds to the tax authorities. Employees see deductions for Social Security and Medicare on their paychecks, but the real burden may be higher as employers' contributions can impact wages. Employers must report and remit withheld taxes on a quarterly and annual basis.
Step-by-step explanation:
Payroll taxes withheld represent a liability for an employer until payment is made. This is because deductions from an employee's wages, such as income tax, social security contributions, and various insurances (such as unemployment and disability), must be held in trust by the employer until they are paid to the appropriate tax authority. The portion of payroll taxes paid by the employer, which includes funding for social security and other insurance programs, is a direct result of employing a worker and varies based on the employee's wages.
In the United States, both employers and employees share payroll tax responsibilities, which are mandated by federal and state governments. The typical deductions from an employee's paycheck include 6.2% for Social Security and 1.45% for Medicare. While it is common to say the employer and employee split the cost of these taxes, economists suggest that the employer's contribution may be indirectly passed on to the employee through lower wages. As a result, employees might be bearing the full cost of payroll taxes. For those in the "gig economy," being classified as independent contractors means they are responsible for paying both the employee and employer portions of the payroll tax.
Employers must comply with the requirement to report payroll taxes quarterly and annually, with electronic reporting generally being mandatory for all but the smallest of employers. The funds withheld are not the employer's property; rather, they are held in trust until remitted to the government. The process is highly computerized, making the withholding of taxes efficient and reducing the burden for both employers and employees. Overpayment of taxes through withholding can lead to a tax refund, where the government returns the excess money to the employee.