Have you ever asked your outsourced bookkeeping and accounting services provider how your payroll tax differs from your income tax? Which government entity collects them? Are they paid locally, to the state, or the national government? For what purposes are they collected?
For the government machinery to run smoothly and fund its various projects, taxes are imposed on its citizens and even foreigners who derive income from the country’s sources. However, foreign nationals who belong to a country with tax treaties with the US may be exempt from paying these taxes.
So, next time you outsource bookkeeping and accounting with running payroll and tax return preparation included in their services, you will comprehend what is entered in the payroll and tax return. How exactly do these two types of taxes differ?
Who pays them?
The employee pays for the entire amount of the income tax. In contrast, payroll tax is derived from both the employer and the employee’s contribution, divided equally between the two of them.
Where are they derived from?
Income taxes are derived from all income sources, not only from wages but also from other investments like real estate, shares of stocks, etc. On the other hand, the payroll tax is merely derived from wages paid by an employer and may be paid monthly, weekly, or as agreed upon in terms of the contract.
What do they consist of?
Income tax may be in the form of a local tax, state tax, or federal tax:
- Levied by the specific locality where you reside.
- The state where you live.
- The tax that you pay the national government.
Whereas payroll tax includes the social security tax (12.4%), Medicare tax (2.9%), and unemployment tax (rate based on the type of business you are employed in). Medicare tax and social security tax constitute the FICA (Federal Insurance Contributions Act) tax for a combined 15.3% with half computed from the employee’s wages and half contributed by the employer counterpart.
What is the purpose of the tax?
The Medicare taxes exemplify payroll taxes for the National Health Insurance Program of the United States, which will directly benefit the employee when availed of during sickness or hospitalization. Social security tax or Old-Age, Survivors, and Disability Insurance program will benefit the employee when an employee becomes disabled prior to retirement or upon reaching retirement age. Unemployment tax or the Federal Unemployment Tax Act is paid for by the employer to fund employees who have lost their jobs or gotten laid off. Income taxes fund the entire government machinery.
What is the nature of the tax?
Income tax is progressive, while payroll tax is regressive. In the former, the higher the income, the higher the tax rate. In the latter, the lower the income, the higher the tax rate. Do you know the distinction between these two types of taxes now? Choosing an outsourced bookkeeping and accounting services provider carefully will indeed assure you of a penalty-free payroll and tax return. They can provide you with experienced meticulous virtual bookkeepers and certified accountants who will astound you with their firm grasp of taxation laws and revenue regulations.