Difference Between Payroll Tax and Income Tax: Payroll Tax vs Income Tax

Payroll Tax vs Income Tax

Taxes are widely known as financial levies that are paid to the government by individuals who are known to receive monetary inflows from their salaries, wages, and profits made from assets. Taxes are usually forcefully obtained; in the sense, no person will willingly pay taxes, and only do so as they are obliged to make such payments to the government by law. Payroll taxes and income taxes are both imposed on an individual’s salary. Due to their similarities, payroll taxes and income taxes are often confused to mean the same thing, even though they are quite different to each other. The article that follows offers a comprehensive explanation of payroll tax and income tax and highlights the similarities and differences between these two types of taxation.

Income Tax

Income tax is a tax that is levied by the government on the income that is made by an individual. An individual who makes a higher income will fall into a higher tax bracket and will, therefore, be subject to higher levels of taxation. Just as tax is charged on an individual’s income, so is the case for a company. The tax that is levied on a company’s income is known as a corporate tax. However, a significant difference between corporate tax and income tax is that corporate tax is charged from the company’s net income whilst income tax is where the individual’s entire income will be taxed. Income tax is a key source of income to the government and, therefore, any individual who is legally employed and has a salary that falls within the relevant tax brackets must pay taxes to the government on the income they earn.

Payroll Tax

Payroll taxes are paid by employees and employers and paid to the government for specific purposes. Payroll taxes are used to fund social insurance, social security payments and Medicare. The money that is collected from payroll taxes goes directly to these types of programs and cannot be used for any other purpose. Payroll taxes will only apply to the funds that are received by an employee as salaries, wages, bonuses, etc. Furthermore, the taxation charged for Medicare will apply to the total income earned; however taxation for social security will apply only for a specific portion of the employee’s income which will vary yearly depending on inflation levels. Payroll taxes are not progressive taxes, and the rates that are paid for Medicare and social security will remain constant regardless of the individual’s income.

What is the difference between Payroll Tax and Income Tax?

Income tax and payroll tax are quite similar to each other as they are both mandated by the federal government and both taxes are based on income earned by individuals. The main difference between the two is that the revenue obtained by the government on income tax will be used for any general operations, whereas payroll tax income will be used strictly for social security and Medicare. Income tax is paid by the employee and will be based on the total income that an individual earns in a year. Total income includes salaries and wages alongside other income such as capital gains, interest income, etc. However, payroll taxes are only derived from an individual’s salaries and wages. Income taxes are progressive, and the tax rate that applies for income tax will increase with the individual’s income. This is not the case with payroll taxes, where the same tax rate will apply regardless of the individual’s income level.