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Payroll Tax vs Income Tax: What's the difference?
Taxes are a sure part of increasing one’s finances, and they also come in various kinds. Two of the most common types that are usually mistaken are payroll tax and income tax. Although both are taken from wages and profits, they perform separate functions and also differ in the way they are calculated, collected and the system for making payments. Whether you are an employer, employee, or self-employed person, being aware of the dissimilarities between payroll tax vs income tax is the main factor in being financially stable and in conformity with tax regulations.
In this article, we’ll understand the meaning of each type of tax, exploring their types and comparing payroll tax vs income tax side-by-side.
What is Payroll Tax?
Payroll taxes are the taxes the companies are required to hold back from the salaries of the employees and also the tax they pay on behalf of those employees. This money goes to finance programs such as Social Security, Medicare, unemployment insurance, and other state-specific programs.
Payroll taxes are separate from general revenue taxes and are specifically allocated to support social welfare programs.
Types of Payroll Taxes
Here are 4 types of payroll taxes companies hold back from employees paycheck:
- Federal Insurance Contributions Act (FICA) Taxes: These Taxes are crucial in providing financial support and healthcare services to individuals aged 65 and older.
- Federal Unemployment Tax Act (FUTA): This tax is often imposed on the employers to finance the benefits that unemployed people receive when they are out of work.
- State Unemployment Tax Act (SUTA): It is specified by state and is commonly paid for by employers.
- Other State-Specific Payroll Taxes: The disability insurance is applied by some states on top of their payroll taxes, whereas paid family leave, as well as other programs, are also deducted.
Who Pays Payroll Taxes?
Here is the list of individuals who pay payroll taxes:
- Employers: They are the ones who take the required taxes from employees’ wages and make the payments to the government for the employee and employer portions.
- Employees: Receive their payroll taxes as deductions.
- Self-Employed Individuals: Pay the Self-Employment Tax, providing both employer and employee portions of Social Security and Medicare.
What is Income Tax?
Income tax, which is a type of revenue, is charged on an individual’s or a business’s income. Unlike corporate or business taxes, which are proportional in general, the American federal income taxes are progressive or proportional based on different income brackets with varying rates. The higher the income, the higher the tax percentage owed.
Types of Income Taxes
Explore three types of income taxes:
- Federal Income Tax: It is a tax that applies to all the U.S. residents and the businesses in the United States, and the rates are from 10% to 37%, according to recent tax laws.
- State Income Tax: It is true that some states impose a flat amount of state income taxes of their own. Those with no or zero state income taxes are Texas and Florida, among others.
- Local Income Tax: Some cities or municipalities, both separately and in various combinations, impose, along with state and federal taxes, local income taxes.
Who Pays Income Taxes?
- Employees: They are forced to deduct payable federal or (if pertinent) state and local income taxes from their salaries.
- Employers: Also, they are responsible for taking the tax of employees out of their wages and transmitting it to the tax authorities, but they do not add to it directly.
- Self-Employed Individuals: You have to figure out how much tax you will owe and then pay it to the government for this quarter.
How Payroll Tax vs Income Tax Are Collected?
The following are the ways payroll tax vs income tax are collected:
Payroll Tax Collection
- Employers automatically withhold payroll tax from their employees’ salaries.
- Employers submit both employee and employer contributions.
- Employees may get their actual taxes refunded or be required to pay additional amounts when they file their annual tax returns.
- Individuals who are self-employed will approximate and settle for themselves their incomes with their taxes every three months.
Income Tax Collection
- Employers are required by law to deduct federal and state income taxes from their employees’ wages based on their form W-4 decisions.
- When annual returns are filed, workers may be entitled to a tax refund or have to pay an additional tax.
- Self-employed individuals typically do not have their taxes withheld from their income, so they have to calculate and pay them on their own a few times.
Implications for Employers and Employees
- Employers are required by every law to make sure that they precisely figure out, hold back, and also pay payroll and income taxes on time in order to evade fines and legal actions.
- When your people undergo their pay slip on a regular basis, it will help you ensure that everything has been deducted correctly.
- People being their own bosses need to be responsible and set financial reserves or make arrangements for their tax obligations so as not to face heavy tax claims when the year ends.
Conclusion:
After understanding the difference between payroll tax vs income tax. Workers must look at their pay stubs on a regular basis to make sure of the right amounts of Payroll taxes support the functioning of the social programs, for example, Social Security and Medicare, whereas income taxes are the backbone of education and army in the nation. Being familiar with each of the taxes will result that the employers staying in compliance, the employees trying to adjust their withholdings, and even the self-employed persons who face their tax liabilities prim and proper.
If you are not sure about your tax obligations regarding payroll or income, get professional help from a tax adviser or use tax software to guarantee compliance and financial stabilization.
FAQs
1: What is the main difference between payroll tax and income tax?
Payroll tax is a duty for both employees and employers, contributing to social security, Medicare, and unemployment schemes, while income tax is a deduction for government operations.
2: Who is responsible for paying payroll taxes?
Payroll tax is a duty for both employees and employers, contributing to social security, Medicare, and unemployment schemes, while income tax is a deduction for government operations.
3: Is payroll tax the same as federal income tax?
No, the payroll tax is explicitly for Social Security and Medicare, while the federal income tax is a wider tax on the revenue of a person that supports the government programs and services.
4: Do self-employed individuals pay payroll taxes?
Yes, Self-employment tax requires self-employed workers to contribute 15.3% of their earnings to Social Security and Medicare taxes, including both the employee and employer’s parts.
5: How is income tax calculated?
Tax in the United States is based on an individual’s gross earnings, status, deductible amounts, and tax credits, with higher earners subject to higher rates through a progressive tariff system.
6: Are payroll taxes refundable?
No, social security and medicare taxes are not refundable, but overpaid income tax can be refunded upon filing a tax return.
7: What happens if payroll taxes are not paid?
They are very harsh. Businesses that do not withhold and pay these taxes can be penalized, charged interest, and even be sued by the IRS. Workers are usually not the ones who are obligated to cover up the missed payroll tax payments.
8: Do all states have income tax?
No, there are some states, like Texas, Florida, and Nevada, which do not have state income tax but they still demand payroll tax payments for their employees.
9: Can I deduct payroll taxes from my income tax return?
Employers can claim a business expense while paying the employer’s share of payroll taxes. Nevertheless, staff members cannot claim a deduction for payroll taxes on their respective tax returns.
10: Why do payroll taxes matter?
They are essential. Payroll taxes are used to finance such social programs as Social Security and Medicare which are of a crucial nature to provide the needed financial help to the retired, disabled persons, and medical care for the old.
