Payroll tax VS Income Tax – what’s the difference?

Payroll tax VS Income Tax difference - Stubcreator

Running a business is painstaking. As a business owner, you need to be an expert in many things, and this comprises having a thorough knowledge of taxes. Taxes play a huge role in running a business successfully; a minor error in this can forfeit your earnings and damage your business for a long time. That is why you must work with a tax professional and understand two crucial taxes involved: payroll tax and income tax. However, of many things involved in taxes, these two often create confusion and chaos.

This article will brief you on all the differences between payroll tax and income tax. Thankfully, with a free check stub maker with calculator, you can calculate the tax income and create your professional stub within minutes.

 

What is payroll tax?

Payroll tax is the tax system used by the United States that consists of deducting a certain percentage of the worker’s pay for some social security. Payroll tax is the type of tax where both the employer and employee contribute towards the tax. This tax is used as a support for social security and is also used as a support for Medicare schemes.

Medicare taxes and social security taxes together are known as Federal Insurance Contributions Act (FICA) tax.

Social security tax is deducted when you reach a certain threshold of income and is affected by the economic inflation rate. Whereas, Medicare taxes depend on the wages and salaries of individuals.

 

What is income tax?

Income tax is an individual tax, and you pay tax based on the amount you earn through various means. It includes money earned from your day-to-day job as well as money earned from other sources. The other source of money can be anything including, bank interest, gains from the stocks, profits from stocks, and property sales. Unlike payroll tax, you are solely responsible for income tax.

Income tax consists of local, state, and federal tax, in nutshell, and this varies from place to place. This can be determined by filling W-4 form, which is also regarded as Employee’s Withholding Certificate. Also, the percentage of income tax is not fixed; the rate depends truly on how your earning is growing.

Along with generating the W-4 form, you can create your stub with a free paystub generator to generate stubs that have every field you need in your stub.

 

Payroll Tax VS Income Tax: Comparative Table

 

Basis for comparison Payroll Tax Income tax
Contributors Both employer & employee Only employee
Consists of Medicare, Security, and unemployment Federal, state, and local
Source Income from wages can only be considered Incomes from various sources are taken into consideration over the year
Nature of tax Regressive tax Progressive tax
Purpose More for employer’s future-benefits More for contribution to the government

 

Final Thoughts

Now that you have a clear understanding of both the taxes, you must determine whether you are an income taxpayer or a payroll taxpayer. It can be determined by the amount of tax you are paying. If you use a free paystub generator for self-employed, you can have a stub with precise information about the tax you pay. Remember, both the taxes have different purposes and are being made to pay for different reasons. If you have the right knowledge about these taxes, you will not forfeit your earnings.

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