Though income tax and payroll tax are very similar since they are both imposed on your wage, these two taxes are in fact in separate categories. This article intends to introduce the difference between income tax and payroll tax.
Payroll Tax usually refers to taxes paid under the Federal Insurance Contributions Act, or FICA, which includes taxes paid to support Social Security (that is known for providing income to older people), and Medicare (that is used to support disabilities). These taxes take a flat percentage of employee wages at around 15%, and the percentage is shared by both the company and the employee. In other words, both the company and the employee pay a portion of payroll tax. Payroll tax is divided into two parts: tax for Social Security and tax for Medicare. Social Security tax only applies to income up to a certain threshold and it may be regularly adjusted for inflation, while Medicare applies to all wages and salaries at a flat rate. For people who is self-employed, they logically need to cover both the employee and the employer portion of these taxes.
Income tax is one of the most well-known forms of taxation, since every person who earns income in the United States should pay income tax on both the federal and state level. The federal level income tax is, however, the payroll tax that is withhold by the federal government. The other part of income tax might be collected by the state government. Different from payroll tax, income tax varies by wages. The income tax is decided by the source of income as well as the government. The federal government imposes income tax for people with different wages, as do many states. Some cities even have their own income tax for people who live or work there.
But in general, payroll tax and income tax are very similar, and they are sometimes collectively referred as employment tax by agencies like the Internal Revenue Service.