Payroll vs Income Taxes: Difference and Comparison

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

  1. Payroll taxes fund social programs like Social Security and Medicare, while income taxes support general government operations.
  2. Employers and employees split payroll tax payments, whereas individuals pay income taxes based on earnings.
  3. 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 vs Income
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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 ComparisonPayroll TaxesIncome Taxes
ContributorsBoth employers and employeesOnly employees
Consists ofMedicine tax, unemployment tax, etc.Federal, state, local tax.
SourceIncome from wagesIncome from various sources
Nature of taxRegressive taxProgressive tax
PurposeFuture benefitsContribution 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:

  1. Deduction from employee’s salary: under this employer withholds his employee’s wage or salary. It is also called withholding tax.
  2. This is used to cover unemployment tax, disability insurance, etc.
  3. 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.

payroll

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:

  1. 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.
  2. 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.
  3. 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). 
  4. Reduction of BOP difficulties: income tax can also contribute to reducing the balance of payment difficulties.
  5. The last objective of this could be reducing the inequality between income and wealth among people from different sections of society.
income

Main Differences Between Payroll and Income Taxes

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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.
Difference Between Payroll and Income
References
  1. https://www.sciencedirect.com/science/article/pii/S0047272713000170
  2. http://webarchive.urban.org/publications/1001065.html
  3. https://www.sciencedirect.com/science/article/pii/S0927537109000414
  4. https://link.springer.com/chapter/10.1007/978-94-009-8174-4_9

Last Updated : 04 August, 2023

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