Income Tax vs Payroll Tax

Difference Between Income Tax and Payroll Tax

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.

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, and they are of two types.

Income-Tax-vs-Payroll-Tax

Income Tax vs. Payroll Tax Infographics

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

Income-Tax-vs-Payroll-Tax

Key Differences

  • One of the main 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 their 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, the payroll tax is a regressive tax 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 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

Basis for ComparisonIncome TaxPayroll Tax
ContributorsOnly 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 taxProgressive Tax.Regressive Tax.
PurposeMore for contribution to the government, society at large;More for employee’s future benefits;

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

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