What is the Difference Between Payroll Taxes and Income Tax?

Payroll Taxes

Payroll tax includes both the tax that your employer withholds from your paycheck and in turn pays to the government on your behalf, along with the payroll taxes paid by the employer. You can learn more about payroll taxes and how to calculate them by clicking on the link here, What is Payroll Tax.

Income tax

Income tax is the tax you pay based on how much money make from different sources. This can come from your job or self-employment, dividends paid by stocks, bank interest, and funds from the sale of assets. You will fill out a W-4 form for your employer to indicate how many withholding allowances to claim to estimate your taxes owed. The federal government imposes income tax as do most states and some local governments. You can have income tax taken from your paycheck by your employer, but you’re responsible for any deficit.

If you are self-employed you are responsible for paying your own income tax in quarterly installments with a 1040-ES voucher or online at irs.gov. These quarterly payments are due 4/15, 6/15, 9/15, and 1/15. Typically, your tax preparer and most tax filing software will let you know how much you need to pay, if any.  If you are unsure, complete the 1040-ES worksheet.

Income Tax vs. Payroll Tax

The biggest difference between income and payroll tax is that payroll taxes are used for Social Security and Medicare (FICA) and income taxes fund things like national defense and other federal government expenses. Another difference is that payroll taxes are calculated at a flat rate while income tax is subject to income-based tax brackets, deductions, and credits based on factors in your life like whether you have a mortgage, give to charity, have rental properties, etc.

The most important thing is to ensure that you are paying the proper estimate throughout the year either through withholding on your paycheck or through estimated tax payments. You may need to do both!

If you are looking tax advice or have any questions about our services. Contact us today!


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