Income Tax vs Payroll Tax: What’s The Difference?

In the United States, the tax system is very complicated and most taxpayers are confused about income tax and payroll tax when they are dealing with the revenue management agent. Although, all of the taxes are different from each other and understanding them in their ways is important for everyone. For employees, taxes are different as compared to the person who owns a business. 

Payroll tax vs Income tax have several distinct factors that play their role while evaluating them, as they have many differences between them. 

As these, both are very common employment taxes, the most important part of payroll management is understanding the differences between them and managing to withhold properly.

Let’s cover income tax and payroll tax so that you as a taxpayer can understand payroll tax vs income tax. 

What Is Income Tax? 

The money collected from the employee’s monthly wages is known as income tax. After collecting the income tax, the federal government, some local governments, and most state governments fund programs for the benefit of a specific state or the country. 

The federal income tax is collected and calculated by the set of rules presented by the Internal Revenue Service (IRS). 

These taxes are paid on the basis of wages earned by the employee. You are required as a business to withhold this tax from your employee’s pay and remit it to the IRS or the appropriate state or local tax authority. Taxes that are collected currently will be listed in the government’s database. 

Determining The Income Tax Withhold 

While paying income tax, your employees need to make a lot of decisions here. A form called W-4 is used where the employees will decide how much they need to withhold on the basis of their financial and household needs. Being the employer you need to make sure each employee fills out the W-4 form, as this form helps in calculating the taxes from the employee’s earnings. 

No matter if you are not paying any employee taxes, it is the responsibility of employer to manage the tax withholdings correctly and ensure that a valid amount is paid to the IRS.

IRS websites can benefit you while calculating the taxes as using their spreadsheet will help in calculating the deduction of the correct amount of federal income tax for each employee. 

What Is Payroll Tax? 

Payroll taxes are the taxes that are used in funding medicare and social security. The term FICA that is known as Federal Insurance Contribution Act, is the law that created payroll taxes. This federal tax is different from the rest of the taxes because it is paid by both the employer as well as the employee and there is no difference in the amount that needs to be paid. 

Determining The Payroll Tax Withhold 

The payroll tax is broken down into two sectors: 

– Social Security 

The employees are obligated to pay 6.2% of their paycheck and the employer and the employer is responsible to match the tax of each employee. 

If a person is earning above $142,800, then they are not subjected to social security tax. 

– Medicare 

1.45% of the employee’s gross salary is paid by the employer and the employees into medicare, a government healthcare system covering retired workers. If an employee is earning $200,000 as a single person and $250,000 as a married person (couple filing jointly), needs to pay an additional 0.9% of his payroll tax. Both employer and the employee will pay a combined 15.3% of FICA taxes from their gross wages. This amount needs to be paid within the given due date. 

– Payroll Vs Income Tax 

In the above discussion about payroll tax definition and income tax intent, the differences are cleared. But to understand these differences more easily, here is a table that compares payroll tax and income tax. 

Comparison Payroll TaxIncome Tax 
Tax Rate 15.3% of the federal payroll tax is decided.  There is a 10% to 37% federal income tax rate. 
Employer Responsibility Employers must withhold their share of payroll taxes, medicare, and social security. The employer reports the earnings and deducts the employee’s monthly wages. 
Employee ResponsibilityAn employee is responsible to pay local payroll taxes based on their city and country e.g. social security and medicare taxThe income tax is paid to the internal revenue service (IRS) by the employee.  
Calculation These taxes are 50/50 split by the employee and the employer. Multiply medicare tax (1.45%) by the gross payment of the employee. Income tax is calculated on the basis of household income as you need to subtract your deductions and exemptions to get an amount of taxable income. 


Understanding the taxes which are applicable to you is very important for being a respectful citizen who pays taxes according to the government law. But to understand these differences in payroll tax vs income tax you need to have an expert who not only guides you to the taxes but also does your taxation work from their side. 

Connect with Bottomline Tax so that we can be your tax preparer because we are responsible to deal with all your taxations and paperwork.