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What is the Difference Between Payroll and Income Taxes?

Last updated 03/20/2024 by

Camilla Smoot

Edited by

Fact checked by

Both payroll and income taxes must be paid each year, but the percentage of taxes withheld and what they fund differ. Employers and employees pay the same percentage of payroll tax, but this is not true of income tax. Income taxes cover national programs such as law enforcement, while payroll taxes cover Medicare and social security expenses.
The difference between what you earn and the amount of money you actually take home after paycheck deductions can be shocking. Payroll taxes and income taxes are two of the biggest deductions you are likely to see on your paycheck.
Read on to discover how they are calculated and what they fund.

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What is the difference between payroll and income taxes?

As we discussed above, there are some pretty significant differences between payroll tax and income tax. This not only includes what they fund but also how they are determined.

Payroll taxes

Federal payroll taxes are taxes on employer and employee wages and may also be referred to as employment taxes. The amount of taxes paid is based on their income, tips, and salary.
Employers remove these taxes from employee wages and give them to the Internal Revenue Service (IRS). Both the employer and the employee pay payroll taxes. The four basic types of payroll tax are:
  • Federal income tax
  • Federal unemployment taxes
  • Social security tax
  • Medicare tax

Income taxes

Income taxes are taxes the government collects from businesses and individuals based on their income. These taxes are collected throughout the year.
Federal income tax is based on wages, investments, salaries, and other forms of income earned. There are four kinds of income tax:

What are payroll taxes and income taxes used for?

In addition to the amounts, payroll and income taxes also fund different areas. While payroll taxes support Medicare and social security programs, income tax supports a variety of programs determined by the local, state, and federal government.

Payroll tax

Payroll tax is a Federal Insurance Contributions Act (FICA) tax. The federal government uses FICA taxes to pay for social insurance programs. The two main FICA taxes are social security tax and Medicare tax.
Social security taxes help people with disabilities, retired workers, and survivors of workers who died. Medicare taxes go towards Medicare hospital insurance.

Income tax

Federal income taxes are used to cover several programs. Some of these include national defense, community development, law enforcement, and more.
However, the federal government is not the only one to collect income taxes. Forty-two states and many local municipalities also charge income taxes. The states that do not charge income tax include:
South DakotaWyoming

How do you calculate payroll tax?

If you’re an employee, your employer will calculate payroll and income taxes for your. However, it’s a good idea to understand how these taxes are calculated. Hey, mistakes happen.

Calculating social security withholding

Multiply the employee’s gross wages by the social security tax rate. This will be the amount deducted from employees’ checks.
Jenny’s gross wages for the current pay period are $2,000. The social security tax rate is 6.2%. To calculate her social security withholding, Jenny would multiply $2,000 by .062. This equals 124, meaning $124 will be deducted from her paycheck.

Calculating Medicare withholding

This is a similar process to calculating social security taxes. Multiply the employee’s gross pay by the Medicare tax rate. This amount will be deducted from the employee’s paychecks.
Russel’s gross wages are $2,000. The current Medicare tax rate is 1.45%. To calculate his Medicare withholding, Russel would multiply 2,000 by .0145 to get 29. This means $29 will be deducted from Russel’s paycheck.

Calculating employer matching

Employers must match what employees pay in Medicare and social security taxes. So, whatever the employee is paying, the employer pays too.
Gina is Jenny and Russel’s employer. Because they are paying $124 in social security withholdings and $29 in Medicare withholding, this is how much she will also pay in taxes.

Having trouble determining your taxes?

If you’re self employed, you will need to work you self-employment and income taxes. Tax preparation software, such as the companies listed below, make it much easier to calculate your tax liability.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Pro Tip

Need help on your taxes, but not sure you can afford it? Check out some free sources for tax help. These resources might be able to help you without breaking the bank.

How do you calculate income tax?

Unlike payroll taxes, income taxes are individually determined when an employee fills out Form W-4. Here, they identify dependents, additional income, deductions, and any extra funds they wish to withhold.
Form W-4
If you are a business owner, calculating the income tax of each employee can become very time-consuming so you may want to hire a bookkeeper or accountant to help you. There are a lot of opportunities for miscalculations and overlooking information.
If you prefer to do it yourself, consider using the IRS’s income tax withholding assistant or using an accounting program that automates the process using your employee’s W-4. Check out user reviews of the best tax preparation software to help you pick which one to use.

Key Takeaways

  • Payroll taxes are taxes on wages, while income tax is collected from businesses.
  • The calculations for these taxes differ, as payroll taxes are the same percentage for everyone but income tax differs by the individual.
  • Payroll taxes contribute to social security and Medicare programs.
  • Income taxes cover federal programs like the social programs and law enforcement.
  • Self-employed workers and small business owners can save time and money by using tax preparation software.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost,, Deseret News, and more.

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