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 stocks, profits from stocks, and property sales. Unlike payroll tax, you are solely responsible for income tax.
Income tax consists of local tax, state, and federal taxes, 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 state unemployment tax||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|
Now that you have a clear understanding of both 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 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.
Related Article: How to Add Additional Earnings to Your Paystubs
What is the difference between payroll tax and income tax?
Payroll tax is a tax paid by both the employer and the employee to fund social programs such as Social Security and Medicare, while income tax is a tax paid by individuals on their earned income.
Who is responsible for paying payroll taxes?
Both the employer and employee are responsible for paying payroll taxes. The employer withholds the employee's share of payroll taxes from their paycheck and pays it to the government on their behalf, while the employer also contributes their share of payroll taxes.
Are payroll taxes and income taxes calculated differently?
Yes, payroll taxes and income taxes are calculated differently. Payroll taxes are calculated as a percentage of an employee's gross pay and are fixed rates that the government determines. On the other hand, income taxes are calculated based on a person's taxable income and can vary depending on their deductions, exemptions, and tax bracket.