Difference Between Income Tax and Payroll Tax
The key difference between income tax and payroll tax is that income tax is the tax imposed by government authorities on the net income earned by the individuals or business entities which is progressive in nature where the person earning higher income has to pay income tax at higher rate of interest and vice versa, whereas, Payroll tax refers to the tax which includes social security tax, taxes for medical care and unemployment taxes etc. where such tax is contributed by both employer and an employee.
Sometimes the terms income tax and payroll tax are used interchangeably, but both of them are different.
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 wages and they are of two types.
- Income tax consists of the 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 own state income tax and payroll tax. The federal income taxes can be exempted by claiming on Form W-4. A part of the income is held back by the employer. This portion of the tax is due to be paid either to the local, state or federal department. Once the tax dues are paid, the employers pay back this withheld income to the employees.
- Payroll taxes consist of medical care taxes, unemployment taxes, and social security taxes. This is the type of tax where both the employer and the employee contribute towards it. Medical care taxes and social security taxes together are also known as FICA (Federal Insurance Contributions Act) tax. The social security tax that the employee pays determines the monthly payments he/she gets after their retirement. The Federal Unemployment Tax Act (FUTA) 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
- One of the differences is the person that contributes towards them. When we look at income tax, the whole tax amount is for the employee to pay. Whereas when you look at payroll tax, both the employer and employee share the tax amount equally between them.
- 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. Apart from wages, it can be through rent from own house or through investments made in shares or through interest from banks etc. Payroll taxes are generally calculated only through the wages of the employee that is the income that a person receives through his job/employment. This income can be paid weekly or monthly or even daily.
- 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 income slabs that are pre-determined. Comparatively payroll tax is a regressive tax as taxes like social security taxes as the slabs are fixed such that high-income people pay as much as the low-income people.
- Income taxes are generally paid for the governments to function. Payroll taxes mostly benefit the taxpayers directly as these taxes are going to help them in Medicare and retirement funds. Even though income taxes help the taxpayers indirectly in some way, the payroll tax is the one that helps the taxpayers directly.
Income Tax vs Payroll Tax Comparative Table
|Basis for Comparison||Income Tax||Payroll Tax|
|Contributors||Only employee.||Both employer and employee.|
|Consists of||Federal, State, and local tax.||Medicare tax, unemployment tax, and social security tax.|
|Source||Incomes from various sources are taken into consideration over the year.||Income from wages can only be considered.|
|Nature of tax||Progressive Tax.||Regressive Tax.|
|Purpose||More for contribution to the government, society at large.||More for employee’s future benefits.|
We know that income tax and payroll tax have their own 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 it is important for us to know how much we are paying the taxes and how are they split. Understanding the differences will help us figure out each type of tax and how they work.
Video on Income Tax vs Payroll Tax
This has been a guide to Income Tax vs Payroll Tax. Here we discuss the top differences between income tax and payroll tax along with infographics and comparison table. You may also have a look at the following articles –