Understanding the differences between payroll tax and income tax is essential for both employers and employees. Both of them are types of employment taxes but they differ in their characteristics and propose separate tax deductions. Both of them being the most common types of employment taxes, demand more of your attention while issuing your paychecks.
This guide will take you to a thorough exploration of the payroll tax and income tax. Then with a detailed understanding of the distinction between them, you will be able to end your journey on a comprehensive note.
An Overview of Payroll Tax
Payroll tax is a fixed tax that the employers monthly deduct from the salaries of their employees. This deducted money is stored in a fund that can be used later on for providing security, Medicare, retirement and unemployment benefits.
While employees see payroll tax as a deduction from their monthly payments, the employer too pays the equal amount for the fund as a payroll tax.
What Is Income Tax?
Income tax on the other hand is levied directly by the government on the total yearly income of an individual, business houses, and other entities. This tax is collected by the government to fill up the government treasury. The fund from this treasury is then used to facilitate different infrastructural projects, government aid and the overall development of the nation.
The income tax liability of an individual or a business entity depends on the rate slab of income he or it comes under. It is statutory to pay income tax and assist in the economic development of the nation and stabilisation.
What Is the Difference Between the Income and Payroll Tax?
Over the past 10 years, India has witnessed over 8% growth in the income tax filing in the 500 to one million income group. This suggests that the lower-middle class of the country is rapidly growing towards higher income levels. And with higher income rates the tax-paying population of the country needs a more comprehensive understanding of their tax obligations.
Now that you get a brief overview of both the taxes with respect to the purpose behind collecting them, it’s time to understand them in detail. A detailed discussion of their differences will help you make your knowledge concrete about them.
Tax Structure
After the purpose, the main deviation between income and payroll tax is in their structures. The payroll tax is generally a flat tax. Employees have to pay it at a fixed rate all through their service period. But the income tax is progressive. Its rate increases with the increasing rate of income, changes in government taxation policy, etc.
The Tax Payer
Both the employer and the employees make equal contributions to the payroll tax. The payroll tax burden is therefore split equally among them. However, the burden of income tax directly falls on the shoulders of the employee. The employer here has to pay their own income taxes separately to the government. In income tax, it is the responsibility of the individuals to file their taxes.
The Base Of Taxation
The base of payroll taxation is solely the earned income of the employee. It is deducted solely from your wages and salaries. No investments, bonds and dividends are subjected to this taxation. Whereas, income tax is levied on a wider range of income types including wages, salaries, bonuses, capital gains, rental and dividends.
Administration
The payroll tax is administered directly by the employers. They directly withhold the correct amount of payroll tax from the salary or wages of their employees’ paychecks. Therefore, in payroll taxes employees do not have to take the stress of calculating and filing their taxes. But in the case of income tax, the individuals are responsible for filing their taxes, reporting their total incomes and calculating their tax liability.
Impact on The Base Pay
Payroll taxes have a direct impact on the employee’s base payment as here a percentage of money is directly deducted from their paychecks. Whereas, the income tax can indirectly impact the overall capital earning of the individual by the end of a fiscal year. Income tax varies according to the credits, investments, and tax filing status of the individual. This variation then differentiates the overall tax burden of the individuals.
Conclusion
After understanding the differences between the payroll and the income tax the purpose and importance of both the taxes should be clear to you. They both deliver direct and indirect benefits. Therefore, calculating them properly in times of tax filing becomes crucial for you. Irrespective of the size of your business, you will need solid tax management to conduct these employee tax deduction operations on time. Hire a financial expert or consider outsourcing taxation consulting services to run your business without tax penalties.
FAQs
- What taxes are considered payroll taxes?
A payroll tax includes items like Medicare, unemployment income, social security, termination payments, leave allowances and fringe benefits. Both the employer and the employees monthly pay payroll taxes for securing these benefits.
- Is payroll tax the same as income tax?
No, payroll tax is different from income tax. The main difference between these two taxes lies in the purpose of paying them. While payroll tax is paid for individualistic benefits the income tax is levied by the government for the overall development of the nation.
- Is payroll tax flat or progressive?
Payroll taxes are flat. Unlike income taxes, they are not progressive. This means the employees have to pay the same percentage of tax regardless of their income. Whereas income tax is solely based on the amount of income of the employees.
- Do workers pay more in payroll taxes or in income taxes?
The amount of payment for income and payroll tax depends on the income level of the employee. Payroll tax is deducted on a monthly basis while income tax is deducted on an annual basis. You can sit and calculate both the tax expenditures to get a comprehensive idea of it.
