What is the Difference Between Payroll Tax and Income Tax?
🆚 Go to Comparative Table 🆚The main difference between payroll tax and income tax lies in who pays them and what they fund. Here's a breakdown of the differences:
Payroll Tax:
- Paid by both the employer and the employee.
- Funds Social Security, Medicare, and other social insurance programs.
- Uses a flat tax rate.
- Includes federal and state taxes related to an employee's taxable compensation.
Income Tax:
- Paid only by the employee.
- Funds public services like defense, education, and transportation.
- Uses a progressive tax rate.
- Includes federal, state, and local taxes.
In summary, payroll taxes are paid by both the employer and employee to fund social insurance programs like Social Security and Medicare, while income taxes are paid only by the employee to fund public services. Payroll taxes use a flat tax rate, whereas income taxes use a progressive tax rate.
On this pageWhat is the Difference Between Payroll Tax and Income Tax? Comparative Table: Payroll Tax vs Income Tax
Comparative Table: Payroll Tax vs Income Tax
Here is a table comparing the differences between payroll tax and income tax:
| Feature | Payroll Tax | Income Tax |
|---|---|---|
| Definition | Payroll tax refers to taxes that include social security tax, taxes for medical care, and unemployment taxes, where both employer and employee contribute. | Income tax is the tax imposed by government authorities on the net income earned by individuals. |
| Who Pays? | Payroll taxes are paid by both the employer and the employee. | Income taxes are paid by the employee. |
| Tax Rate | Payroll tax uses a flat tax rate, meaning it is a percentage that is withheld from employee wages. | Income tax uses a progressive tax rate, meaning the higher the income, the higher the tax rate. |
| Calculation | Payroll taxes are calculated based on the employee's wages and include amounts paid by both the employee and the employer to cover federal taxes (Social Security and FUTA) and state taxes owed. | Income taxes are calculated based on various factors, such as an employee's Form W-4 and filing status, and are made up of federal, state, and local taxes. |
| Funding | Payroll taxes fund specific programs like Social Security, Medicare, and unemployment insurance. | Income taxes can be used for any purpose decided by local, state, or federal government. |
| Examples | Federal payroll tax is also known as FICA tax, mandated by the Federal Insurance Contributions Act. Most of this goes toward social security—both employers and employees pay 6.2% until a limit of $142,800. | Federal income taxes are calculated using an employee's W-4 form and are progressive, dependent on their household and marital circumstances, and employees will only pay if they earn over a certain threshold. |
Read more:
- Capital Gains Tax vs Income Tax
- Salary vs Income
- Wage vs Income
- Financial vs Taxable Income
- Invoice vs Tax Invoice
- Duty vs Tax
- Salary vs Wages
- Income vs Revenue
- Tax Return vs Tax Refund
- Direct Tax vs Indirect Tax
- VAT vs Sales Tax
- Taxable Income vs Adjusted Gross Income
- Capital Gains vs Income
- Subsidy vs Tax
- Tax vs Levy
- Gross Salary vs Net Salary
- Net Income vs Net Profit
- Remuneration vs Salary
- Tax Offset vs Tax Deduction