Federal/national, state/provincial, and/or local agencies require employers to perform various payroll functions, such as withholding amounts from employees’ compensation to cover income tax, social security and medicare.

Payroll taxes are levied by government agencies on employees’ wages, tips, and other compensation. The amounts withheld by employers from employees’ pay for federal income, social security, and Medicare taxes are considered to be trust-fund taxes, because the money is held in a special trust fund for the U.S. government. Amounts withheld for state and local income taxes are held in trust for the state and local governments.