Payroll Tax vs. Income Tax – What Is the Difference? 2024

Unless you are a trained professional, it can be difficult to fully understand the ins and outs of both federal and state taxes. You are responsible for paying a certain amount each year, but it is not always clear how much you have to pay and what your taxes are being used for. This can be particularly true with the taxes that are taken out of every paycheck you receive.

In most cases, unless you are self-employed or do primarily contract work like consulting, you will receive a pay stub each pay period. This usually details how much you made overall, what money was withheld for things like healthcare or a retirement fund, and how much was paid in taxes. Even with this detailed account, you may not know why you are paying certain taxes, like income and payroll tax. Experienced tax attorneys can help you understand the differences between payroll and income taxes and why you are expected to pay them.

What Are Payroll Taxes?

One type of tax that is deducted from every paycheck that an employee receives, whether they are paid weekly in a serving position or monthly in a corporate job, is the payroll tax. These taxes must be paid on the state and federal levels in order to fund programs that benefit employees. There are three primary programs that dictate payroll taxes that must be collected.

FICA taxes, which were created by the Federal Insurance Contributions Act, fund Medicare and Social Security on the federal level. Additionally, FUTA taxes are used to fund federal unemployment benefits through the Federal Unemployment Tax Act. Employers are also responsible for SUTA, or State Unemployment Tax Act, taxes to provide funding for unemployment benefits from the state.

Payroll taxes differ from income taxes because they are paid by both the employer and the employee, depending on the type of tax. FICA taxes, for example, must be paid by both employers and their employees, while FUTA and SUTA taxes are solely the responsibility of the employer.

Regardless of who pays, the programs that are supported through payroll taxes are intended to benefit people in need. Unemployment can help someone who was injured and has to miss work or who was laid off make ends meet until they get more work. Medicare is a program that provides health insurance and healthcare benefits to those in need. These programs are all beneficial and properly funded by payroll taxes, but they are not the only taxes that are deducted from an employee’s paycheck.

What Are Income Taxes?

Another type of tax that is deducted from every paycheck an employee receives is income tax. Those who live in Tennessee, South Dakota, Wyoming, and several other states, will only pay a federal income tax because those states do not collect income taxes. In addition, anyone who files taxes in Florida is also able to avoid any local income taxes, which saves them more money. Income tax is calculated on a progressive scale, so you will pay a higher tax percentage when you earn a higher income.

The tax rate that is due each year varies based on how much a person earns, so you could end up paying 10%, 12%, and over 35% in taxes for different earnings. For example, if you are filing taxes as a single person in Florida for 2024 and work in marketing, making $85,000 a year, you will be required to pay several different tax rates. A 10% income tax is due on $11,000 of income, 12% on everything from $11,000 to $44,725, and 22% on the rest of your annual income. An experienced tax attorney can help you file tax information correctly in order to pay the proper amount.

FAQs About Payroll Tax vs. Income Tax

What Is the Payroll Tax Change for 2024?

One major change to payroll taxes for 2024 is that the wage base limit for Social Security increased, even though the tax rate has stayed the same since the 1990s. This means that any wages earned up to $160,200, which is an increase of over $13,000, are subject to Social Security taxes.

Who Pays Income and Payroll Taxes?

When you are employed for any period of time, income taxes will automatically be deducted from every paycheck, but your employer is responsible for making sure those deductions are paid to the IRS. You and your employer will both pay Medicare and Social Security taxes because those are federal programs paid by everyone. One type of tax that is only paid by an employer is unemployment taxes, which are collected at the federal and state level.

Will Income Tax be Different for 2024?

The IRS makes changes on a consistent basis, changing things like tax rates and income thresholds to provide additional relief and assistance to employees. For 2024, one thing that has been taken into account is the rising costs associated with inflation, including the cost of living and necessities. The IRS has made several key adjustments to help employees deal with things like increasing income tax bracket thresholds to allow for more take-home pay.

What Is the Main Difference Between Payroll and Income Taxes?

Payroll taxes and income taxes may seem similar, but the government uses them for different things. Payroll taxes are used to fund programs that benefit citizens. This means that if you need unemployment or Medicare at some point in your life, it will be funded by payroll taxes. Income taxes come directly out of every employee’s paycheck and are used to fund the daily functioning of the government.

Contact the Skilled Tax Attorneys at TaxSmith LLC

Trying to understand that taxes that are withheld from paychecks can be frustrating and confusing because it may seem like you are losing the money that you need to live. When you know more about the tax systems and requirements, including why taxes like Medicare, unemployment, and Social Security are being withheld and how much should be taken, you will be more aware if you are paying too much. The skilled Jacksonville Beach tax attorneys from TaxSmith, LLC can help you understand how much you should be paying, organize your tax information, and get any refunds you may be due. Contact our office today for guidance.