Explaining the Differences Between Payroll and Income Taxes

As a business owner, taxes are an inescapable obligation that follows the job description. When payday arrives, so do financial obligations to your local, state, and federal governments. 

Payroll and income taxes are two of the most important tax requirements of operating a business in New York. These taxes help provide a wealth of services to the public and also contribute to the post-career livelihood of many older adults by funding programs like Social Security and Medicare. 

One question we commonly hear is “What is the difference between payroll and income taxes?”. While they might appear to serve a similar purpose at a glance, there are some notable differences that you should be aware of. 

Who Pays Payroll Taxes? 

Business owners and their employees both share the financial responsibility for payroll taxes. These payments are allocated toward programs like Social Security and Medicare. In most cases, these taxes can be withheld from an employee’s paycheck. 

Who Pays Income Tax? 

Income taxes are paid solely by employees. Usually, these taxes are withheld by the employer on their employees’ behalf as part of the payroll process. 

Depending on the state where your employee works and where you operate your business, income tax can vary. While there is an income tax at the federal level, some states do not require income tax, such as Florida, New Hampshire, or Washington. 

Income tax can be calculated based on the information an employee provides on their W4 form. Factors like marital filing status, number of household dependents, and other similar circumstances can affect how much is deducted from one’s paycheck. 

Other Differences Between Payroll and Income Tax 

Progressive Vs. Regressive 

Income taxes are progressive. As employees’ salaries progress upward over time, the amount they pay in taxes also increases.

Conversely, payroll taxes are regressive in nature and the percentage that is paid will decrease with the more an employee makes. Unlike income tax, payroll tax adheres to a fixed rate pegged to one’s salary and does not have flexible factors that affect calculations. 

Purpose 

As we mentioned earlier, payroll taxes are allocated toward programs funded by the federal government. The money that is withheld is repurposed for specific uses. 

Income tax, however, is not purpose-based. Instead, local, state, and federal authorities are able to determine how these funds are used based on the perceived needs of the local or national population. 

Calculating Payroll Taxes

Another major difference between payroll and income tax is how they are calculated. 

Payroll taxes are adjusted to account for inflation each year. Until a person’s annual salary has reached $142,800 (2021), employers and employees are required to both pay 6.2% and an additional 1.45% for Medicare.  Once the limit has surpassed $200,000, the rate increases to 7.1% for employees but not for their employers. 

For any updates to payroll taxes, check the IRS business portal for more information. 

Calculating Income Tax

Income taxes are calculated based on a variety of factors in the employee’s personal life. These are determined by the information on their most up-to-date W-4 form. Over time, the amount of income tax they pay can fluctuate as their financial responsibilities evolve, such as marriage, having children, etc. 

With the W-4, employees must also submit a withholding form. This allows the employer to automatically deduct the employee’s income tax amount from their check so that income tax payments are completed in a timely and efficient manner. 

Geography also factors heavily into accurately calculating income tax. In states that do tax income, some municipalities and counties may also do the same at the local level. These should be accounted for when the employee submits their W-4 and withholding form. 

Get Help with Payroll and Income Taxes for Your Business 

At TBM Payroll, our team provides comprehensive payroll, human resources, benefits, and workers’ comp administration services to contractors and hospitality and transportation companies in the Glens Falls, NY area.

Running your business’s day-to-day operations requires enough time, energy, and stress. Don’t let payroll headaches interfere with what you love most about your work. 

As a trusted partner, we will fully manage all aspects of your payroll administration. To learn more about our services, request a quote online or contact us anytime for additional information.