What is Payroll Tax?

Payroll tax is the broad term for taxes and social contributions calculated on wages — including pension, health, unemployment and family-allowance contributions — typically split between employer and employee and remitted by the employer.

In Europe, payroll taxes are dominated by social security contributions rather than income tax. Switzerland charges roughly 6.4% AHV/IV/EO and 1.1% ALV on the employee, plus pension fund (BVG) and accident insurance — total employee share around 12–14%. Employers pay roughly the same on top, plus family allowances.

Germany's social wedge is much larger: about 20% from the employee and 20% from the employer, covering pension, health, unemployment and long-term care. France adds 22% on the employee plus 42% employer-side — among the highest in Europe. Italy lands around 9.5% employee and 30% employer.

Payroll taxes finance social insurance and are usually capped at an annual ceiling. Above the ceiling the marginal cost of employment drops sharply — a key consideration in executive compensation and self-employment decisions.

Example

On a EUR 5,000 gross monthly salary in Germany, the employee pays about EUR 1,000 in payroll taxes and the employer about EUR 1,000 more — total labour cost EUR 6,000, employee net before income tax EUR 4,000.

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Related terms

Income Tax

Income tax is a tax levied by governments on the wages, salaries, business profits and other earnings of individuals and corporations, usually charged at progressive rates that rise with the amount of income.

Withholding Tax

Withholding tax is an amount that the payer (employer, bank, custodian) deducts from a payment to a beneficiary and remits directly to the tax authority on the beneficiary's behalf, as a prepayment of the beneficiary's eventual tax bill.

Tax Allowance

A tax allowance (or personal exemption) is a fixed amount of income that is tax-free for everyone — or for specific categories of taxpayer such as the elderly, parents or low earners — applied before the tax brackets kick in.

Tax Return

A tax return is the annual declaration filed with the tax authority that reports your income, deductions, credits and tax already paid, used to calculate your final tax liability and any refund or top-up due.

Frequently asked questions

Are payroll taxes refundable?+

Generally no — they fund insurance, not tax. Pension contributions translate into future pension entitlements.

Is there a ceiling?+

Yes in most countries: e.g. CHF 88,200 for BVG mandatory in Switzerland, EUR 90,600 for German pension contributions.

Do self-employed pay payroll tax?+

They pay both sides themselves — usually about 20–30% of net profit in social contributions.