The difference between income and payroll tax is often a misunderstood topic. From a quick glance at a paystub, one might overlook the different taxes involved in calculating the take home pay. But not all taxes are the same. From the employer perspective, it is especially important to know the difference and the impact they can have on your business and employees.
Let’s cover income tax first.
Income tax is simply a tax on an employee's wage or salary. While this might sound similar to payroll tax, the main difference is in who is responsible for paying the tax. Income tax is the responsibility of the employee. Income tax pertains to federal, state, and local income taxes. These taxes are based off your location and amount of withholding allowances you claim on Form W-4. One major difference between payroll tax and income tax is income tax is not a single flat rate; it is based off the federal withholding table. The revenue generated from income tax goes to fund public services like defense, education, and transportation.
In general terms, payroll taxes are taxes on the salaries and wages of employees. You may be wondering why you pay this tax, as well as tax on your income. Well, the revenue generated from these taxes goes on to support social insurance programs like social security and medicare. In fact, these two programs combined account for the second largest source of revenue for the United States government. While every employee feels the burden of a payroll tax, it is important to note that he or she is not alone. Both employees and employers contribute to payroll taxes, effectively splitting the tax bill down the middle at 7.65%.
Both income tax and payroll tax have a profound impact on America’s businesses and employees. Payroll tax is closely associated with both the employee and employer, with both parties essentially splitting the tax. However, income tax is a burden on just the employee: abiding to the tax bracket system based off of an employee's gross annual income.