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Payroll vs Income Tax: What Are the Differences?

If you’re a small business owner, you already know there are a lot of complicated tax laws to abide by.

This isn’t anything new for those running successful companies but for the startup entrepreneur, it might seem a little confusing. The government has rules for what comes out of your company and when you should pay your dues.

If you have employees, this is just part of keeping a business open. It’s your job to take care of your employees. That’s why it’s essential you understand the payroll vs income tax differences.

We’re here to help you do that. Keep reading to learn about the difference between taxes and payroll for your business.

What is Payroll Tax?

In the United States, a payroll tax is a tax imposed for both the employers and the employees, and is calculated as a percentage of the employee’s wages. The most common payroll tax is the Social Security tax, which is imposed on all workers. Other payroll taxes include the Medicare tax and the federal unemployment tax.

Let’s have an overview for both.

Social Security Tax

The Social Security tax is a payroll tax that is imposed on both employers and employees to fund the Social Security program. The tax is 6.2% of an employee’s wages, and it is matched by the employer. Self-employed individuals must pay the full 12.4% tax. The Social Security tax is only imposed on the first $147,000 of an individual’s wages (as of 2021).

The tax is imposed on both the employer and the employee, with the employer matching the employee’s contribution. The tax is used to fund the Social Security program, which provides benefits to retirees, disabled workers, and the dependents of deceased workers. The program is funded through payroll taxes, interest on the trust fund’s investments, and income taxes on benefits. The Social Security tax is imposed to ensure that the program is adequately funded.

Medicare Tax

The Medicare tax is a payroll tax that is imposed on wages and self-employment income. The tax is used to fund the Medicare program, which provides health insurance for seniors and other eligible individuals. The Medicare tax rate is 1.45%, and the tax is generally imposed on wages and self-employment income above a certain threshold.

The Medicare tax is imposed because it is required to fund the Medicare program. Medicare is a social insurance program that provides healthcare services to seniors and other eligible individuals. The tax revenue collected from the Medicare tax is used to pay for the costs associated with providing these services.

What is an Income Tax?

An income tax is levied on both individuals or any entity and it can vary depending on the income or profits (taxable income) of the taxpayer. The income tax is progressive, meaning that tax rates increase as income increases. The United States imposes a federal income tax on the taxable income of individuals, corporations, trusts, and other legal entities.

The federal income tax is composed of two parts; a marginal tax rate and an effective tax rate. The marginal tax rate is the tax rate imposed on the last dollar of taxable income. The effective tax rate is the total tax paid divided by the total taxable income.

Let’s explain both further.

Marginal Tax Rate

A marginal tax rate is the tax rate that an individual or corporation would pay on an additional dollar of income. The marginal tax rate is often used to describe the tax rate that an individual would pay on their last dollar of income.

The term “marginal” comes from the Latin word for “border” or “edge”. In other words, the marginal tax rate is the “borderline” tax rate. The marginal tax rate can be applied to an individual’s taxable income or to a corporation’s taxable income.

Effective Tax Rate

An effective tax rate is the percentage of your income that you pay in taxes. The United States has a progressive tax system, which means that your effective tax rate will be higher if you make more money.

An effective tax rate is the average rate at which a person or corporation is taxed. The effective tax rate for an individual is the average rate at which the person’s taxes are calculated. The effective tax rate for a corporation is the average rate at which the corporation’s taxes are calculated.

The Key Difference Between Payroll vs Income Tax

The key difference between payroll and income tax is that payroll is deducted from an employee’s wages before taxes are calculated, while income tax is calculated on an individual’s total income.

Payroll taxes are used to fund Social Security and Medicare, while income taxes are used to fund the government’s general operations. Employees are responsible for paying payroll taxes, while employers are responsible for paying income taxes. Payroll taxes are typically deducted from an employee’s paycheck on a regular basis, while income taxes are typically due once a year.

The key difference between payroll and income tax is that payroll is deducted from an employee’s wages before taxes are calculated, while income tax is calculated on an individual’s total income. This means that an employee’s taxable income will be lower if they have payroll taxes deducted from their paycheck, since those taxes are not included in the calculation of income tax.

If you believe you need some help to do all the taxes for your business, you can hire payroll services for small business like this.

Why Payroll and Income Tax Are Beneficial to the Economy

Payroll and income tax are beneficial to the economy for a number of reasons. For one, they provide revenue for the government, which can be used to fund public goods and services. They also encourage work and investment by providing a way to save and invest money.

Taxes create a more level playing field between businesses and workers, and between different types of businesses. And lastly, they help to reduce income inequality.

Know What Types of Taxes You Are Required to Pay

While payroll and income taxes may seem similar, they are actually quite different. Payroll taxes are taxes that are deducted from an employee’s paycheck, while income taxes are taxes that are paid on the income that an individual earns. It is important to know the difference between payroll vs income tax, as you are required to pay both types of taxes.

For more informative articles aside from this income tax guide, feel free to visit our blog page.

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