The only thing I know about money is that I never have any (which come to think of it, might be cause and effect all in one).
Someone please explain to me the difference between “income tax” and “payroll tax.” On my paycheck I have:
“Medicare” – okay, know what that is
“Soc Sec” – ditto
“Federal” – which is the one that adds up and at the end of the year you do the math and the 1040 and they either ask for more or (if you’re me) you get most or all of it back (sometimes even more than that). This is “Income Tax,” right? So where is the the “payroll tax?” Is the &$#@% gummint lying to me again?
And before someone asks, no, there is no “State Tax” on my paycheck.
Income tax is tax on income from any source: wages and salaries, payments for services (if your client pays you directly and you do not receive a wage or salary), products sold, investments that paid dividends or other distributions, interest on bank accounts, etc.
Payroll tax applies to the tax calculated (and withheld) on the accounts a company uses to handle its payroll. It may mean either the amount withheld (if you are the employee) or the entire process of managing that general ledger account to withhold and track money from your employees’ paychecks and send it on to the government.
From your perspective, all the taxes that reduce your check are payroll taxes, even though some of them (F.I.C.A. and Medicare) are not actually part of the income tax. City and state withholdings are both payroll taxes and income taxes, although they are not directly tied to the Federal income tax.
This is just probably a difference in semantics, but I would say that FICA (Social Security) and Medicare are also income taxes because they are a tax based on your income. However, they’re not called income taxes, though, in fact, they are. They are not part of what is called “the federal income tax.”
To further clarify:
When an employer pays an employee, that cash compensation is called payroll. From the employer’s point of view, they must withhold (based on an estimation) the amount the employee will owe to the federal government (and the state and/or city government – you’re local laws may vary). In addition to handing over to the government(s) the taxes the employee owes, the employer also pays some extra. For example, the employee pays 7.5% of wages for FICA, and the employer must match that out of its own pocket (of course, we can argue that the cost is passed on to the customers or to the employees in the form of lower salaries).
So, both the employer’s and the employee’s tax payments, from the point of view of the employer, is called payroll taxes.
From the point of view of the employee, their payroll check is part of their income. They may also have other income: interest, self-employed second jobs, winnings at casinos, etc… When governments tax your income, they tax all your income, not just the income from your payroll check as an employee.
If we take the simple case that your only income is your employee payroll check, then you’ll see on your check stub that the federal government is taxing that income, and making you pay into three pots:
[list=1]
[li]Federal Income Tax: makes the government go.[/li][li]FICA: Social Security for the elderly[/li][li]Medicare: Medical insurance for the poor/elderly[/li][/list=1]
Note that other types of income may be taxed differently than the way payroll income is taxed. For example, if you did odd jobs as a self-employed contractor, you would have to pay the whole 15% of FICA on that income. And there are a lot of other complications for figuring out the taxes on other types of income.
Hope this helps.
Peace.
Waiting for the knee-jerk anti-tax contingent to be along any second now…
