Payroll tax and income tax form the major tax components in workers’ tax responsibility. It is required by employers to withhold part of the wages that they pay to their employees toward taxes. For accurately deducting payroll taxes and filing tax returns timely, business owners must delegate their payroll management process to be reliable and experienced payroll service providers.

Payroll Tax: The Fundamentals

Also known as employment tax, the payroll tax is a fixed percentage withheld from employees’ salaries to be paid to the government on their behalf. Payroll tax contributes to the payments exclusively associated with social security, Medicare, and unemployment.

The state and central governments collect these tax payments and use the amount to cater to the needs of individuals. Being a flat-rate tax, payroll tax is calculated based on an employee’s gross wage or salary.

The Fundamentals of Income Tax

Income tax is levied by the government and collected from employees to fund public welfare schemes and developmental programs. Income tax may be flat or progressive and is collected according to the salary earned by an employee. There are different income tax slabs, and employees have to pay the tax pertaining to the slab they belong to.

Employers are responsible for deducting income tax from their employees as per governmental norms. In addition to this deduction at source, employees, as individuals, need to pay income taxes on other income sources outside their regular employment. Dividend, bank interest, and profit realized from the sale of property or stocks are some of such sources.

How Does Payroll Tax Differ from Income Tax

Both employers and employees are required to pay payroll taxes; Medicare and social security necessitate this. On the other hand, income taxes have to be paid by employees only, and this is their contribution, as individuals, toward funding public services and government spending.

Employees must pay income tax only if they earn more than a fixed threshold. Payroll tax is levied on the wages and salaries of employees, the amount being used for supporting social insurance schemes and medical care programs.

The government uses the amount realized through payroll taxes for specific social security and Medicare programs. According to the need, income tax amounts collected from individuals help the government create a general fund that can be used for any welfare scheme.

The Significance of Understanding Payroll Tax and Income Tax

Failure to deduct taxes accurately from your employees may lead to civil or criminal sanctions. Moreover, negligence or improper tax deduction and payment attract legal actions and financial penalties.

By not withholding the correct tax amounts from employees, employers are indirectly impacting the government’s various programs. This, in turn, impacts the programs meant to support society. Calculating and deducting taxes accurately and in a timely manner calls for expertise. This necessitates any modern business organization to partner with payroll management service providers.

Payroll Tax and Income Tax – Key Differentiators

• The employee’s income tax is payable only while both employees and employers have to contribute toward payroll tax.
• Income tax comprises the tax levied by the Central Government in India to contribute to society at large, while payroll tax involves mostly Medicare, social security, etc.
• Employees’ wages or salaries are the sources for payroll tax, whereas income tax considers different sources.
• Payroll tax happens to be regressive, while income tax is a progressive tax.

Wrap-Up

Payroll tax and income tax differ in several ways, but employers mostly withhold both tax amounts by way of deduction during salary payout.