The main difference between payroll and income tax is who is paying the taxes and what the taxes are funding. Payroll taxes are paid by the employer and employee, and they fund Medicare and Social Security. Income taxes are only paid by employees, and the taxes fund government spending’s and public services such as education and transportation.
Taxes provide the money for federal, local, and state governments to fund essential services, so it is important to know who is required to pay certain taxes and what they are specifically funding.
How different taxes affect employees
For most employees, payroll taxes hit harder than income taxes. Income taxes are progressive, so the more money an employee earns, the more they will have to pay. On the other hand, payroll taxes are regressive, so the low and moderate-income taxpayers must pay a bigger share of their incomes in payroll tax than high-income earners.
How payroll tax is calculated
Federal Insurance Contribution Act (FICA) taxes fund the federal Social Security and Medicare programs. The FICA tax rate is 15.3%. The employer and the employee each pay 6.2% toward Social Security and 1.45% toward Medicare. Only the first $160,200 of your earnings are subject to Social Security tax.
The Federal Unemployment Tax Act (FUTA) provides for payments of unemployment compensation to workers who have lost their jobs. The standard FUTA tax rate is 6% on the first $7,000 of wages subject to FUTA.
State Unemployment Tax Act (SUTA) is a payroll tax required from employers that helps fund state unemployment benefits. SUTA rates vary by state, so it is important to be aware of current rates.
The SUTA rates for Utah employers range from 0.3% to 7.3%. The taxable wage base for 2023 increased from $41,600 in 2022 to $44,800. SUTA rates in Arizona range from 0.07% to 18.78%. Arizona’s wage base also increased from $7,000 to $8,000. The SUTA rates in Wyoming range from 0.09% to 8.5% with a taxable wage base of up to $29,100.00 per employee per year.
FUTA and SUTA are paid 100% by the employer.
How income tax is calculated
Income taxes are only paid by employees but are deducted from paychecks by employers and submitted to the state and federal government on behalf of the employee. These taxes fund government spending and all but nine states tax employee incomes. The states that do not tax employee incomes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Federal income taxes are determined by calculating an individual’s adjusted gross income (AGI), this is done by taking their total household income and reducing it by certain items (such as contributions to their 401(k)). Then, from their AGI, exemptions and deductions are subtracted to get the taxable income.
It is important to understand the differences between payroll and income taxes and whether the employee or the employer is responsible for paying those. If you have any questions regarding payroll and income taxes, reach out to us at firstname.lastname@example.org.