What Is the Difference Between Payroll Tax & Income Tax?

Income taxes, not payroll taxes, affect your annual tax obligation.

Income taxes, not payroll taxes, affect your annual tax obligation.

When your take-home pay is less than your salary, all the taxes might feel the same. However, income taxes differ from payroll taxes. Payroll taxes are composed of the Medicare tax and the Social Security tax and are withheld by your employer, but they don't count toward your income taxes due when you file your tax return.

Source of Taxation

Payroll taxes are imposed exclusively by the federal government and include the Social Security tax and the Medicare tax. Income taxes are imposed by the federal government and most states. However, some states, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming do not have assess income taxes, as of publication. In addition, your employer also pays a portion of the payroll taxes on your behalf.

Taxable Income

Payroll taxes apply only to the income you earn as an employee, such as salary, hourly wages and bonuses. Income taxes, on the other hand apply to all of your income for the year. For example, not only is your salary subject to income taxes, but your gains on the sale of stock, interest on your bank accounts and your retirement plan distributions also count as taxable income when figuring your income tax.

Income Limits

All of your income each year is subject to income taxes, no matter how much you earn. The Medicare tax applies to all of your earned income. The Social Security tax, on the other hand, only applies to a specified amount of earned income each year. The amount varies from year to year with inflation. For example if the Social Security limit is $111,000 and you have $150,000 of earned income, you would include the entire $150,000 when figuring your income taxes and your Medicare taxes, but would only use $111,000 to figure your Social Security taxes due.

Tax Rates

The federal income tax and many state income taxes are progressive, which means that as you earn more money, the tax rates increase. For example, your first $30,000 might be taxed at a 20 percent rate and the next $30,000 at 25 percent. With payroll taxes, the rate doesn't change. As of 2012, the employee portion of the Medicare rate is 1.45 percent and the Social Security rate is 4.2 percent.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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