If you’re a business owner or employee trying to understand your tax obligations, one question often comes up: what’s the difference between payroll tax and income tax?
Though they both deduct from your earnings, these taxes serve different purposes and are governed by distinct laws. Understanding the key differences between payroll taxes and income taxes is essential — especially if you’re running payroll, managing HR compliance, or trying to minimize penalties.
In this article, we’ll break down what each tax is, who pays it, how it’s calculated, and what it funds — so you can stay compliant and make better financial decisions.
Is Payroll Tax the Same as Income Tax?
No — payroll tax and income tax are different types of federal taxes with distinct purposes, rates, and responsibilities.
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Payroll taxes are used to fund programs like Social Security and Medicare. These taxes are split between employers and employees.
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Income taxes go into the general U.S. Treasury fund and are based on your overall earnings, with rates that increase as income rises (progressive tax brackets).
Key Difference at a Glance
| Payroll Tax | Income Tax |
|---|---|
| Funds specific programs (e.g. Social Security) | Funds general federal operations |
| Flat rate applied to wages up to a cap | Progressive rate based on total income |
| Shared by employer and employee | Primarily paid by the employee |
| Includes FICA taxes (6.2% + 1.45%) | Ranges from 10% to 37% federally |
This distinction is important for employers processing payroll and for employees trying to understand what’s being withheld and why.
What’s the Difference Between Payroll and Income Taxes?
The main difference between payroll tax and income tax lies in who pays them and what they fund.
- Payroll taxes are shared between employers and employees. These taxes are used to fund Social Security, Medicare, and other social insurance programs like unemployment.
- Income taxes, on the other hand, are primarily the employee’s responsibility and fund general public services — such as defense, education, and infrastructure.
Both taxes are typically withheld from an employee’s paycheck, but they follow different rules, rates, and remittance procedures.
Payroll Tax vs. Income Tax: Side-by-Side Comparison
When differentiating income vs payroll tax, employee and employer responsibility, levies, and tax rates are a few things to compare. Below is a comparison chart to help you differentiate them properly without dependents.
| Category | Payroll Tax | Income Tax |
|---|---|---|
| Who Pays It | Both employer and employee split the cost | Mostly the employee |
| What It Funds | Social Security, Medicare, unemployment insurance | Federal and state programs (defense, education, infrastructure, etc.) |
| Tax Rates (2024-2025) | 6.2% for Social Security + 1.45% for Medicare
Employer matches both |
10%–37% based on IRS income brackets; varies by filing status |
| Calculation Method | Flat percentage applied to gross wages | Based on adjusted gross income (AGI) after deductions and exemptions |
| Wage Cap | Social Security capped at $168,600; Medicare has no cap | No income cap |
| Employer Responsibility | Match FICA contributions and file Forms 941, 940, W-2 | Withhold correct amounts, issue W-2s, file Form 944/945 (as applicable) |
| Employee Responsibility | Pay share of FICA and any local payroll taxes | File federal (and often state/local) income tax returns annually |
| Governing Agencies | IRS, SSA, and state unemployment agencies | IRS, state tax agencies |
Difference Between Payroll and Income Tax Rates
Understanding the difference between payroll tax rates and income tax rates is key to accurate payroll processing and tax planning. These rates are structured and applied very differently.
Payroll Tax Rates (FICA)
Payroll taxes are governed by the Federal Insurance Contributions Act (FICA) and fund Social Security and Medicare. These are flat-rate taxes, meaning every worker pays the same percentage regardless of income (up to a cap for Social Security).
- Social Security tax: 6.2% (applies to wages up to $168,600 in 2024)
- Medicare tax: 1.45% (no income cap)
- Total FICA per employee: 7.65%
- Employers must match this amount, bringing the combined total to 15.3%
Note: For wages above $200,000, an additional 0.9% Medicare surtax applies for employees (not employers).
Do Payroll Tax Rates Vary by State?
While federal payroll taxes (Social Security and Medicare) are set at fixed national rates under FICA, some states also impose their own payroll-related taxes, and these can vary significantly.
These state-level payroll taxes may include state unemployment insurance (SUTA), disability insurance (SDI), paid family leave, or workforce development surcharges.
The rate and structure of these taxes differ based on state law and employer size, industry, or experience rating. Below is a chart with a few examples of state payroll tax rates.
| State | Type of Payroll Tax | Structure |
|---|---|---|
| California | SDI, Paid Family Leave | Flat rate (0.9% in 2024 on wages up to $153,164) |
| New York | Disability Insurance, Paid Family Leave | Flat + capped |
| New Jersey | Disability, Unemployment, Workforce Dev. | Progressive caps |
| Oregon | Paid Leave Oregon | Shared employer/employee contribution |
| Washington | Paid Family & Medical Leave | Progressive, capped |
| Texas | Unemployment insurance only | Flat employer-paid rate |
Note: These state payroll taxes are in addition to federal FICA taxes, and not all states impose them. Employers must comply with both state and federal withholding and reporting obligations.
Income Tax Rates
Income taxes are progressive, meaning the more you earn, the higher your tax bracket.
- Federal income tax rates for 2024 range from 10% to 37%, depending on taxable income and filing status.
- Employees can reduce taxable income through deductions (e.g., standard or itemized) and exemptions.
State Income Taxes: Flat vs. Progressive
- Flat income tax states: States like Colorado, North Carolina, Indiana, and Michigan charge a single tax rate to all earners regardless of income level.
- Progressive income tax states: States like California, New York, New Jersey, and Minnesota impose higher rates on higher earners.
- No state income tax: Texas, Florida, Washington, Alaska, South Dakota, Nevada, and Wyoming do not impose a state income tax.
This means an employee’s total income tax burden may include both federal and state components — while payroll tax is always federal and split 50/50 with the employer.
Payroll Tax vs. Income Tax Levies
While both payroll and income taxes are levied by the IRS, they’re applied to different income types and serve different purposes. Knowing what each tax is levied on helps clarify what’s being withheld from your paycheck — and why.
What Is Income Tax Levied On?
Income tax is imposed on a taxpayer’s total taxable income — including wages, business profits, investment gains, and other earnings. This tax is calculated after applying eligible deductions and credits, which reduce the total amount subject to tax.
Because the U.S. uses a progressive tax system, higher income levels are taxed at higher rates. Most individuals don’t pay tax on their full gross income due to exemptions, deductions, and credits.
What Are Payroll Taxes Levied On?
Payroll taxes are levied on employee wages and self-employment earnings, specifically to support federally mandated programs. These taxes are withheld from employee paychecks, and employers are required to match certain portions.
For those who are self-employed, the entire amount is paid directly through self-employment tax filings. Payroll tax rates are consistent across the country, although some states may impose additional payroll-related contributions depending on local regulations.
How Are Payroll and Income Taxes Used?
Both income taxes and payroll taxes play critical roles in funding government services — but they support very different programs.
Income Tax Usage
The federal government uses income tax revenue to fund a wide range of general operations, including:
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National defense
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Public education and infrastructure
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Law enforcement
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Foreign affairs and international aid
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Servicing the national debt
Income taxes also support social programs such as healthcare, housing assistance, and workforce development. These funds are not earmarked — they go into the U.S. Treasury’s general fund and are allocated across many departments.
Payroll Tax Usage
Payroll taxes are specifically allocated to fund social insurance programs under the Federal Insurance Contributions Act (FICA). These include:
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Social Security (retirement, disability, and survivor benefits)
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Medicare (health insurance for seniors and certain disabled individuals)
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Unemployment insurance (in many states)
Unlike income taxes, payroll taxes are dedicated funds — meaning the money collected is legally designated for specific programs that directly benefit workers and retirees.
FAQs on Income and Payroll Taxes
Payroll and income taxes can be confusing — especially when you’re dealing with different rates, responsibilities, and reporting rules. Below are answers to some of the most frequently asked questions about how these taxes work, who pays what, and how they impact your paycheck.
Is payroll tax flat or progressive?
Payroll taxes are flat, not progressive. This means all employees pay the same percentage of their wages — regardless of income level — for Social Security and Medicare. These rates are fixed under federal law and do not increase with earnings (though Social Security has a wage cap).
What taxes are considered payroll taxes?
Payroll taxes include:
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Social Security tax
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Medicare tax
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Federal and state unemployment taxes
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Some state-specific programs (e.g. disability insurance or paid family leave)
For self-employed individuals, these are combined and paid as self-employment tax.
Can payroll taxes be deducted on your income tax return?
Yes, but only for self-employed individuals. If you’re self-employed, you may deduct the employer-equivalent portion of payroll taxes (7.65%) as a business expense on your federal income tax return. Employees cannot deduct payroll taxes.
Do self-employed people pay payroll tax?
Yes. If you’re self-employed, you’re responsible for both the employee and employer share of payroll taxes. This is called self-employment tax and currently totals 15.3% (12.4% for Social Security and 2.9% for Medicare).
What happens if an employer doesn’t withhold payroll tax?
Employers are legally required to withhold payroll taxes. If they fail to do so, they can face IRS penalties and the employee may still be responsible for underpaid income tax. Businesses can also be held personally liable under the Trust Fund Recovery Penalty.
How do payroll and income taxes show up on my paycheck?
On a typical pay stub, payroll taxes appear as separate lines for Social Security, Medicare, and possibly state disability/unemployment insurance. Income tax will be listed as federal withholding, and possibly state or local withholding, depending on your location.
The Bottom Line on Payroll Tax vs. Income Tax
Understanding the difference between payroll taxes and income taxes isn’t just about knowing what’s withheld from your paycheck — it’s about staying compliant, planning ahead, and avoiding costly mistakes.
While both taxes reduce take-home pay, they serve different purposes and follow different rules:
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Payroll taxes fund programs like Social Security and Medicare, and are shared between employers and employees.
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Income taxes fund the broader federal budget and vary based on income, deductions, and where you live.
Whether you’re an employer processing payroll, a self-employed professional filing quarterly returns, or an employee trying to decode your pay stub, having a clear understanding of how these taxes work helps you make smarter financial and business decisions.