# Payroll Tax Withholding

> Payroll tax withholding is the process by which an employer calculates, deducts and remits the income tax and social security owed on an employee's pay to the local tax authorities, so the correct amounts reach the state rather than the worker's bank account.

Payroll tax withholding is where an employer takes the taxes due on an employee's wages out of gross pay and sends them straight to the relevant authorities. It typically covers income tax and the employee's share of social security. The employee receives net pay; the withheld amounts never pass through their hands.

Alongside withholding, the employer usually owes its own employer-side contributions, such as social security, unemployment insurance and payroll levies, which are paid on top of the wage rather than deducted from it. Together these obligations are country-specific, and both the rates and the filing deadlines differ from one jurisdiction to the next.

Getting withholding wrong is costly. In many countries the employing entity is jointly liable for tax it failed to withhold or remit, and can face interest and penalties. This is a common reason companies employ people through an employer of record rather than attempting cross-border payroll from an entity that is not set up for it.

## What is the difference between withholding and employer contributions?

Withholding is money taken out of the employee's gross pay, chiefly income tax and their share of social security, then remitted to the authorities. Employer contributions are separate amounts the employer pays on top of the salary. Both are statutory, but only withholding reduces the employee's take-home pay; contributions add to the employer's cost.

## Why does withholding vary so much between countries?

Each jurisdiction sets its own tax bands, social security rates, wage ceilings and filing calendar. A rate that applies in one country has no equivalent in another, and thresholds change from year to year. This is why accurate payroll requires local knowledge in every country of operation, not a single global formula.

## How does an EOR handle payroll tax withholding?

As the legal employer, an employer of record calculates the correct withholding and employer contributions for each country, deducts and remits them to the local authorities, and files the required returns on time. Because it holds the employing entity, it also carries the statutory responsibility that would otherwise fall on the client.

## Key facts

- **US Social Security withholding (2026):** 6.2% up to a $184,500 wage base (Source: Thomson Reuters Tax & Accounting, verified 2026-07-28)
  In the United States, 6.2% is withheld from employee wages for Social Security up to the 2026 wage base of $184,500, with the employer matching that amount, plus 1.45% each for Medicare on all wages with no ceiling.

## Frequently asked questions

### Who is legally responsible for withholding payroll taxes?

Whichever entity is legally the employer. In most countries that entity must calculate, deduct and remit the correct amounts, and it can be held liable if it does not. When you employ through an employer of record, that responsibility sits with the EOR, not with you.

### Is payroll tax withholding the same as the total cost of employment?

No. Withholding is deducted from the employee's gross pay, so it is part of their salary, not an extra cost to you. Employer social contributions, paid on top of the wage, are what add to your cost of employment. The two are often confused when comparing quotes.

### What happens if an employer withholds the wrong amount?

Under-withholding can leave the employing entity jointly liable for the shortfall, plus interest and penalties, in many jurisdictions. Over-withholding leaves the employee out of pocket until it is corrected. Both undermine a clean payroll, which is why local accuracy matters on every run.

### Can I run cross-border withholding without a local entity?

Not compliantly on your own. Withholding and remittance generally require a registered employing entity in the country. An employer of record already holds one, so it can withhold and remit correctly on your behalf without you setting up locally.

## Sources

- [SSA Announces Social Security Taxable Wage Base for 2026](https://tax.thomsonreuters.com/news/ssa-announces-social-security-taxable-wage-base-for-2026/), Thomson Reuters

_Last updated 2026-07-28. Reviewed by Teamed's in-house employment-law team. Source: https://www.teamed.global/glossary/payroll-tax-withholding_