Income Tax vs Payroll Tax: What’s The Difference?

If you are running a business, you know how stressful tax season is. You need to take care of accurate tax filings with proper codes, tax laws, compliance, deadlines, and so on. That’s why clients across the globe hire us to take the tax burden off your plate.

Generally, taxes are very confusing, business taxes are even more. Here are quick refreshers on some basics: Businesses usually have to deal with two types of taxes- income tax and payroll taxes.

Often by taxes, it is usually referring to taxes on business income. But the company or business house is also responsible for withholding payroll tax from the salary of the employee/staff.

Income Tax Vs Payroll Tax

  • Payroll tax

Payroll tax is withholding a fixed percentage from the salary of the employee as a tax deduction for the security of the employee.

Under this, both employer and employee contributions to the fund. The tax amount is directly deducted from the employee’s salary at the time of payment.

Payroll taxes are payable both by the employer and employee as a contribution to Social Security and Medicare. Social and medical security includes medicine, hospital care, retirement benefits, and disability.

Currently, the Social Security tax rate for the employer is 6.2% plus 6.2% for the employee. And the Medicare tax rate is 1.45% for both employers and employees. In addition to the federal payroll tax, state and payroll taxes are also applicable.

  • Income tax

Income tax refers to the tax payable by the employee and is subject to federal, state, and tax laws. The filing of federal taxes is done using the employee’s W-4 form.

The W-4 form is a progressive tax form that is dependent on household circumstances and marital status. The employee will only pay if they earn a certain threshold. The income tax rate is not fixed; it rises in line with the employee’s income bracket.

Difference between payroll and income taxes

The main difference is that income tax is paid by the employee only, while payroll taxes are paid by both the employer and employee. Note: Both the payroll tax and income tax are withheld by the employers at the time of payroll processing.

Because income taxes are progressive, employees who earn more pay more tax, which has a greater impact on the household.

On the other side, payroll taxes are regressive, meaning that as you earn more, a lower percentage of your salary will go into a payroll tax.

The purpose of payroll taxes is a contribution to a federal payroll tax fund-specific program, whereas income tax can be used for any state, federal or local government program.

Accurate calculation and filing of taxes are essential, but if you do it yourself, it might be a risky and expensive error.

The best solution is to outsource to Meru Accounting. Our payroll expert uses technology and expertise to save time, stay compliant, and hassle-free tax reporting.

To get started, book a no-obligation appointment with us today.


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