Difference Between Income Tax and Payroll Tax

Employers are responsible for holding part of the wages given to the employees as employment taxes. Employment taxes are deducted from the employee’s gross wagesGross WagesGross wages are the amount of remuneration paid to employees before any deductions like taxes, including social security and Medicare, life insurance, pension contributions, bonuses.read more in two types.

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  • Income tax consists of local, state, and federal taxes. The taxes vary from place to place as some localities charge an additional local income tax. Most states have their state income tax and payroll tax. The federal income taxesFederal Income TaxesFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more can be exempted by claiming on Form W-4. The employer holds back a part of the income. This portion of the tax is due to be paid either to the local, state, or federal departments. Once the tax dues are paid, the employers pay back this withheld income to the employees.Payroll taxes consist of unemployment taxes and social security taxes. It is the type of tax where both the employer and the employee contribute towards it. Medical care and social security taxes are also known as FICA (Federal Insurance Contributions Act) tax. The social security tax that the employee pays determines the monthly payments they get after their retirement. The Federal Unemployment Tax Act (FUTAFUTAThe FUTA tax, often known as the federal unemployment tax act, is a payroll tax that employers must pay on the wages they pay their employees.read more) provides insurance if a previous employee is unemployed, and the Medicare tax provides the cost of medical expenses after the employee retires at the age of 65.

Income Tax vs. Payroll Tax Infographics

Let’s see the top differences between Income Tax vs. Payroll Tax.

Key Differences

  • One of the main differences is the person that contributes to them. When we look at income tax, the whole tax amount is for the employee to pay. When you look at payroll tax, the employer and employee share the tax amount equally.Income tax consists of taxes that the employees pay for the location (like a local tax that is paid for the locality where you stay), the state tax that you pay for the state that you live in, and the federal tax for the government. Payroll tax consists of taxes like medical care tax, unemployment tax, and social security tax.Income taxes are taxes for various incomes that a person receives. This income can be paid weekly or monthly, or even daily. Apart from wages, it can be through rent from their own house, investments made in shares, interest from banks, etc. Payroll taxes are generally calculated only through the employee’s wages, the income a person receives through his job/employment.Income tax is more of a progressive tax because as the salary of the employee increases, the income tax is also increased by the level of pre-determined income slabs. Comparatively, the payroll tax is regressive tax Regressive Tax A regressive tax is the system of taxation where all citizens in the country are taxed at the same rate without considering their income levels. As a result, a more significant percentage of the income of the low-income group is charged as tax compared to the high-income group.read more as the slabs are fixed such that high-income people pay as much as low-income people.Income taxes are generally paid for the governments to function. Payroll taxes benefit the taxpayers directly as these taxes will help them with Medicare and retirement funds. Even though income taxes help the taxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more indirectly in some way, the payroll tax is the one that helps the taxpayers directly.

Income Tax vs. Payroll Tax Comparative Table

Final Thoughts 

We know that both taxes have their differences, but both tax amounts are withheld by the employers while giving the wages. Both taxes are being made to pay for different reasons, and we need to know how much taxes we pay and how they are split. Understanding the differences will help us figure out each type of tax and how they work.

Income vs. Payroll Tax Video

This article has been a guide to Income Tax vs. Payroll Tax. Here we discuss their top differences, infographics, and a comparative table. You may also have a look at the following articles –

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