Learn the basic difference between payroll taxes and income taxes

When you work a job in the United States, you will notice on your payslip the withholdings for both payroll taxes and income taxes. These are both pretty much the same concepts, with some key differences that we will learn further in this blog. Any accounting firm Maryland can solve doubts or questions about these concepts for you.

Every time an employer pays wages to his employees, he is supposed to withhold a certain amount from the employee’s wages. This is an employment tax. It can be further divided into payroll tax and income tax. You will often notice that the terms payroll tax and income tax are used interchangeably, but they are very different. A CPA firms in Maryland will be easily able to explain the difference to you.

The payroll taxes are levied by the federal government. There is a flat rate at which these taxes are deducted from an employee’s pay. There is always a portion that is also paid by the employer. This is quite simple to understand. On the further hand, we find an income tax. This is a much more complex system to understand and go through. The money you earned from sources other than work is taxed here. You can also apply for deductions, exemptions, and credits, if applicable. The final place or the purpose for which these taxes are collected are also very different.

What is payroll tax?

In payroll tax, you are levied a flat tax rate, a certain percentage from your wages. The employer will match the same percentage or amount as his own contribution. This amount goes towards programs like Social Security and Medicare. It includes hospice care, health care, disability, retirement, etc. Payroll tax is obvious and can be seen in the way it can directly help the person paying for it.

What is income tax?

Income tax includes federal, state, and local taxes. Unlike payroll tax, the income tax makes use of a progressive tax rate. The federal income tax that needs to be deducted is dependent on the information provided by your employee. The wages and pay frequency of an employee will eventually determine how the federal income tax amount is affected. If you do not understand how to do this, you can get in touch with a tax accountant Maryland to help you. It is not clear as to where this amount goes and how it will help the person paying for it.

There are two methods in this system - percentage and wage bracket. State income tax and federal income tax are very similar. State income tax can be both flat or progressive rates. A company helping with tax preparation in Maryland can make you understand the basics of these systems.

Key differences

• The payroll tax has a simple flat-rate while income tax amount or rate depends on various factors like deductions and credits, income-based tax brackets, if you have children, or whether you pay any mortgages.

• The payroll tax mainly goes towards a specific purpose like Medicare and Social Security. The income tax amount can into several different funds, be it Federal, State, or City.

• In the case of the payroll tax, the amount is shared by the employee and the employer. But the income tax is entirely paid by the employee himself.

• Incomes tax is a progressive tax, meaning that as the wages or salary of the employee increases, the tax deducted also increases. But in comparison to that, the payroll tax is regressive, meaning that as the wages or salary of the employee increases, the tax remains the same or decreases.

• The payroll tax paid by the employees helps them directly while the income tax paid by the employees only helps them indirectly.

These are some of the basic differences between payroll tax and income tax. To understand these differences better, you can get in touch with a Columbia Maryland CPA.

Conclusion

Taxes are often easily misunderstood by people. When a system is so complex that it is difficult to understand for people, it is natural that people will make a lot of mistakes or try to run away from it. But that is not a solution. In the end, running away from it will only create more problems for the person doing it. But this is why we have so many companies offering tax preparation Columbia Md.

For any employment taxes, it is the employer who is responsible for withholding and reporting. Filing and submitting for the tax systems can be extremely complex and can often leave people confused and frustrated to no end. This is why people give these responsibilities to accountants in Maryland.

Small business accounting has different things and factors affecting them. So if you have a small business and you need to understand taxation better for your business, you must get in touch with a small business cpa accounting firm.