Difference between Payroll Tax and Income Tax

Employers must withhold a portion of employees' pay to pay employment taxes. Two sorts of employment taxes are taken out of an employee's gross pay.

What is Payroll Tax?

Unemployment insurance and social security contributions are examples of payroll taxes. It's a tax in which both the company and the employee participate. The FICA (Federal Insurance Contributions Act) levy covers healthcare costs and social security contributions. The retiree's monthly payout is based on the social security tax the worker contributed throughout their working years. Insurance against joblessness is provided by the Federal Unemployment Tax Act (FUTA), and medical costs are covered by Medicare beginning the year after retirement, regardless of age.

What is Income Tax?

All levels of government impose some form of tax on citizens' incomes. A municipal income tax is added in certain areas, while others do not. State income taxes and payroll taxes are typically imposed by each state independently. To avoid paying federal income tax, just check the appropriate box on Form W−4. The company withholds a portion of the payment for tax purposes. This tax payment must be made to either the state or federal government. After the government gets its share, the withheld wages are returned to the workers.

Differences: Payroll Tax and Income Tax

The following table highlights how Payroll Tax is different from Income Tax −

Characteristics Payroll Tax Income Tax
Contributors Payroll taxes are split evenly between employers and workers. An employee is responsible for paying the entire income tax.
Consists of Payroll taxes include social security, unemployment, and medical care. Depending on where you reside, you may owe several levels of taxation on your income− some are collected at the state level, others at the federal level, and yet others at a local level (such as a municipal tax that is paid for the locality where you dwell).
Source Wages, or the money an employee earns from his work, are the primary factor used to determine how much money must be withheld for payroll taxes. A person is required to pay taxes on all of their income. It's possible to send this money once a week, once a month, or even once a day.
The income tax is also calculated from income in other ways, such as by renting out a room in their home, investing in the stock market, banking on the interest on their savings, etc.
Nature of Tax Payroll taxes is regressive compared to income taxes since the tax brackets are not adjusted for inflation. Income tax is considered progressive because it grows proportionally with the employee's compensation, according to a set of income brackets.
Purpose The recipients of payroll taxes are the taxpayers who will profit from the money's use in programs like Medicare and retirement savings.
Unlike income taxes, which only benefit taxpayers in the abstract, payroll taxes benefit workers directly.
Governments typically rely on income taxes to fund their operations.


While both federal and state taxes have unique characteristics, we can all agree that they both represent a significant portion of the earnings paid to employees. Both taxes are being levied for different reasons, and we need to know how much we're paying and how it's being distributed. Paycheck withholding taxes include, among others, federal income tax and state and local payroll taxes.

Compared to the tax rates applied to individuals' incomes, the payroll tax is a more regressive collection method. This is because payroll taxes are only levied on money coming in, and most payroll taxes have a maximum salary before they kick in.

In general, interest rates are stable over much of the middle−income range, but they decline gradually as one approaches the top end of the income spectrum. Income tax is a type of tax that everyone must pay based on how much money they make each year. If we can identify the distinctions, we can better understand the function of each tax.