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Difference Between Payroll Tax and Income Tax

What is Payroll Tax?

Payroll tax is probably the most hated tax that a business is charged with. If you are a large employer, you are charged a percentage of your total expenses depending on which state you are based and where you employ people. So what exactly is this payroll tax? Payroll tax is a group of taxes levied on the earnings of the employees and self-employed individuals. Payroll tax, as the name suggests, is a kind of tax imposed on employees or employers and that percentage goes to the government on the employee’s behalf. Payroll tax is divided into three basic categories – taxes that the employees pay, taxes that the employer pay, and taxes that both employee and employer pay. Federal payroll taxes are levied on the employee’s earnings and paid to the IRS.

What is Income Tax?

Income tax, as the name suggests, is a tax imposed by the government on the income of individuals and businesses, but is not limited to earnings in the form of salary. Income tax is the government’s right and is imposed on the income of each earning individual or businesses. Every source of income that is qualified as taxable comes under the income tax –sources such as profits from businesses, house rent, bonuses, incentives, capital gains income, and so on. It is basically a percentage of your pay that goes directly to the government and is calculated on the basis of applicable tax slab. Income tax is payable on the income earned during the previous year and is assessed in the immediately succeeding financial year which is called an assessment year. Tax rates may vary depending on the category of the taxpayer and the type of income.

Difference between Payroll Tax and Income Tax

Definition 

– Income tax is a marginal tax imposed by the government on the income of individuals and businesses based on the category of the taxpayer and the type of income and how much. Income tax is marginal tax system where you pay a pre-set rate depending on what income category you fall in. Payroll tax, on the other hand, is a kind of tax imposed on employees or employers and that percentage goes to the government on the employee’s behalf.

Calculation 

– Income tax is a flexible tax rate system that is calculated on the basis of the applicable tax slab. Incomes tax is calculated on various factors, including type of taxpayer, type of income, source of income, and the amount of income. It is subject to a variety of tax brackets, deductions, and credits. Tax rates may vary depending on the status of the taxpayer and the type of income. Payroll tax is typically a flat rate tax system and is calculated as a small percentage on the wages, salary and bonuses paid to the employees.

Nature 

– Income tax is a progressive tax system that varies based on the type of taxpayer, which means the more you earn, the more you pay as income tax. In the United States, the individual income tax rate starts from 10% and goes up to 37%. Payroll tax, on the other hand, is a less progressive tax system than income taxes because payroll taxes tax only earned income, and most payroll taxes include a maximum taxable earnings base.

Payroll Tax vs. Income Tax: Comparison Chart

Summary

In a nutshell, both payroll tax and income tax are taxes deducted from paychecks. However, payroll tax is a less progressive tax system that individual income tax rates because payroll tax is taxable only on the earned income and most payroll taxes include a maximum taxable earnings base. Average rates are virtually flat across the broad middle of the income distribution, and decline at the top income scale. Income tax is a kind of tax imposed on the income and is calculated on the basis of how much money you make.

Is payroll tax and income tax the same thing?

Although, both payroll tax and income tax are taxes deducted from paychecks, payroll tax is a group of taxes imposed on the earnings of the employees and self-employed individuals under the Federal Insurance Contributions Act (FICA). Income tax is a kind of tax imposed on the income and is calculated on the basis of how much money you make.

What taxes are payroll taxes?

Payroll taxes are categorized into four basic types: federal income, social security, federal unemployment and Medicare. Payroll tax is a group of taxes levied on the earnings of the employees and self-employed individuals.

Is the payroll tax the same as Social Security tax?

Social Security is financed through a dedicated payroll tax. The Social Security Tax is imposed on both employees and the employer to fund Social Security programs. It is collected in the form of a payroll tax as mandated by the FICA or a self-employment tax paid under the SECA (Self-Employed Contributions Act).

Does the payroll tax include federal income tax?

Federal incomes tax is where you pay the largest percentage of your income in taxes. At its core, federal income tax is a more progressive tax system, meaning the more you earn, the more you pay in taxes. Income tax is marginal tax system where you pay a pre-set rate depending on what income category you fall in. The federal taxes are the taxes deducted to fund social security programs and Medicare.

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References :


[0]Bragg, Steven M. Accounting for Payroll: A Comprehensive Guide. New Jersey, United States: John Wiley & Sons, 2015. Print

[1]Cordes, Joseph J., et al. The Encyclopedia of Taxation & Tax Policy. Washington, D.C., United States: The Urban Institute Press, 2005. Print

[2]Ahuja, Girish and Ravi Gupta. Practical Approach To Income Tax, 39E. Punjab, India: Wolters Kluwer (India) Pvt Ltd, 2019. Print

[3]Image credit: https://pix4free.org/assets/library/2021-05-06/originals/payroll_tax.jpg

[4]Image credit: https://live.staticflickr.com/5027/5856708903_294549a95a_b.jpg

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