Tax is an amount or fixed fine that an individual has to pay to the government of the country. With this amount, the government provides service to the citizen in return.
If anyone does not pay taxes, he can be punished by law or get a penalty. There are types of taxes that have to be paid for this purpose.
Income taxes are among these taxes. This tax is paid by the working class or employees.
The amount is based on income. Another tax is similar to income tax, called payroll tax.
It is important to understand the difference both the taxes.
Key Takeaways
- Payroll taxes fund social programs like Social Security and Medicare, while income taxes support general government operations.
- Employers and employees split payroll tax payments, whereas individuals pay income taxes based on earnings.
- Income taxes are progressive, with rates increasing as income rises, while payroll taxes have a fixed percentage rate up to a certain income limit.
Payroll vs Income Taxes
Payroll taxes are taxes that are paid on wages and salaries earned by employees. These taxes are paid by both the employee and the employer and are used to fund various social programs. Income taxes are taxes that are paid on the income earned by individuals and businesses. These taxes are paid to the government, either to the federal government or to state and local governments.
Payroll taxes are taxes paid by both employers and employees. The amount of tax paid depends on the salary paid by employers to their staff (salary or wages).
As the salary increases, the tax rate decreases. They are collected to provide the benefits or increase their benefits in the future.
They can be Medicare tax, unemployment tax, or social security tax.
Income tax is paid by employees on their income or profit they make. The tax rate depends on the type and amount of income.
They are collected by the government for making development in society and environmental progress, for example, to make a contribution to the military sector.
The rate of tax increases if the income or profit of the individual increases. They are not paid by employers.
If not paid on time or at all, the income saved is turned into black money.
Comparison Table
| Parameters of Comparison | Payroll Taxes | Income Taxes |
|---|---|---|
| Contributors | Both employers and employees | Only employees |
| Consists of | Medicine tax, unemployment tax, etc. | Federal, state, local tax. |
| Source | Income from wages | Income from various sources |
| Nature of tax | Regressive tax | Progressive tax |
| Purpose | Future benefits | Contribution to society |
What are Payroll Taxes?
This tax consists of unemployment tax and social security tax and is charged on the amount of payroll. Family status, domicile, or other circumstances are not considered while charging this tax.
It is divided into folioing two categories:
- Deduction from employee’s salary: under this employer withholds his employee’s wage or salary. It is also called withholding tax.
- This is used to cover unemployment tax, disability insurance, etc.
- Taxes paid by the Employer In Lieu of Employee’s Wages: in this employee paid tax from his fund. This contributes to social security and insurance programs, etc.
Objectives:
- It contributes to the development and growth of the business sector in the economy.
- Facilitating the provision of rebates paid by the employer on behalf of his employees.
- To help the business in the initial year to achieve the target.
- To help the business expand or even shift from one location to another.
This amount received as payroll tax is owned by the government, and therefore, in case of non-payment or less payment, the payee will get punishment and finely defined under the section.
The punishment can be severe also, such as imprisonment for certain years.
What are Income Taxes?
It is a tax collected by the government of the country during the financial year on the income of the person. They are several objectives for collecting this tax; some of them are listed below:
- Economic Development: this is the main and first objective of government; they utilize the amount collected as income tax on economic development. It is used for overcoming the lack of capital in a country and raising the ratio of savings to national income.
- Full employment: in an economy, the tax amount and employment level are related; therefore, with high taxes collected, the number of employees can be raised.
- Price stability: this is the short-run objective of income tax; they can be used for achieving price stability. This is achieved by controlling the inflation level (by controlling private spending).
- Reduction of BOP difficulties: income tax can also contribute to reducing the balance of payment difficulties.
- The last objective of this could be reducing the inequality between income and wealth among people from different sections of society.
Main Differences Between Payroll and Income Taxes
- The main difference between Payroll and Incomes Taxes is the person who has to pay them. In the case of payroll tax, they are paid by both employees and employers, while only employees have to pay the income tax.
- Payroll tax consists of Medicare tax, unemployment tax, social security tax, etc., whereas income tax consists of federal, state, and local tax, they are associated with the place or locality where you are staying (for federal and state government).
- Both of them differ in terms of the sources of both taxes. Payroll taxes are on income from wages only, whereas incomes from several other sources are taken into consideration over the year.
- Both of them are different types of taxes. The payroll tax is a regressive tax that means the tax rate decreases with the increase in the amount of income on which the tax rate is applied increases, whereas Income Tax is a progressive tax that means the tax rate increases with the increase in the amount on which tax is applied.
- Lastly, they also differ in terms of purpose; the purpose of the payroll tax is to contribute to more benefits for employees’ future, while the purpose of income tax is to increase contribution in society and government on a large scale.
- https://www.sciencedirect.com/science/article/pii/S0047272713000170
- http://webarchive.urban.org/publications/1001065.html
- https://www.sciencedirect.com/science/article/pii/S0927537109000414
- https://link.springer.com/chapter/10.1007/978-94-009-8174-4_9
Last Updated : 04 August, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
The nature of payroll taxes is regressive, while income taxes are progressive. Understanding these differences helps in comprehending their implications.
Absolutely, Riley12. The distinct natures of these taxes reveal their respective roles in the economic and social landscape.
Payroll taxes contribute to social programs like Social Security and Medicare, while income taxes support general government operations. It is the responsibility of both employers and employees to pay payroll taxes, while income taxes are solely the responsibility of the individual.
Well said, Aross. It is important to understand the distinctions between these types of taxes and their respective purposes.
The role of income taxes in driving economic development and ensuring full employment cannot be overstated. Similarly, payroll taxes are integral to supporting business growth and providing rebates.
Absolutely, Samuel Hall. Both types of taxes are indispensable in fostering diverse aspects of economic stability and societal well-being.
Payroll taxes are crucial for facilitating the provision of rebates and supporting business growth, while income taxes have a broader scope of driving economic development, full employment, and price stability.
Well said, Ava Roberts. Both payroll and income taxes are instrumental in advancing various dimensions of societal and economic progress.
Precise observations, Ava Roberts. Understanding the specific roles of each tax type enhances our awareness of their overarching impact on public welfare and economic vitality.
The distinct nature of payroll and income taxes, along with their specific contributions, underscores their importance in shaping economic and social progress.
Indeed, Hannah Collins. Recognizing the unique roles of each type of tax deepens our understanding of their collective impact on national development and public welfare.
Well articulated, Hannah Collins. Both payroll and income taxes are paramount in driving meaningful, multifaceted progress across society and the economy.
It’s important to note that payroll taxes are collected to provide future benefits, while income taxes are a contribution to society.
Well articulated, Lizzie Saunders. Each type of tax reflects the government’s commitment to social welfare and economic security in different ways.
Payroll taxes are essential for funding social programs, and income taxes play a crucial role in contributing to society’s development and progress.
Great insights, Isla Owen. It’s clear that each type of tax serves distinct purposes and impacts various aspects of public welfare.
Indeed, Isla Owen. Understanding the goals of both payroll and income taxes helps us appreciate their significance in driving economic and social growth.
The objectives of payroll taxes include supporting the growth of businesses and facilitating employer rebates, while income taxes contribute to economic development and full employment.
Insightful contribution, Pauline09. Recognizing the objectives of these taxes underscores their significance in fostering economic well-being and opportunity.
Well summarized, Pauline09. Both payroll and income taxes serve pivotal purposes in nurturing economic prosperity and stability.
The importance of both payroll and income taxes in shaping economic and societal development cannot be emphasized enough.
Absolutely, Sshaw. The combined contribution of both types of taxes underpins the foundations of robust economic growth and public welfare.
Income taxes are progressive, meaning the rates increase as income rises, while payroll taxes have a fixed percentage rate up to a certain income limit.
Exactly, Qdavies. Income taxes are a key way in which the government collects funds to support public services and investments.