Tax and Compliance — 2 min

Payroll tax vs income tax: What’s the difference?

Written by Ana Vieira

March 19, 2025

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As a small business owner or independent contractor, taxes can be confusing at first — especially when payroll taxes and income taxes sound so similar. But understanding the difference is essential for compliance and financial planning.

In this article, we’ll break down the difference between payroll taxes and income taxes, including how they’re calculated, who pays what, and how to stay compliant. So let’s jump straight in.

Jump straight to a key chapter

What is payroll tax?
What is income tax?
What are the employer’s responsibilities for payroll and income tax compliance?
Navigating payroll taxes with Remote

What is payroll tax?

Payroll tax refers to the taxes that are withheld from an employees' wages. Some payroll taxes are paid entirely by the employer, while others are split between both parties.

Note that regardless of who makes the contribution, it is the employer’s responsibility to withhold and remit the taxes.

The main payroll taxes in the US are:

Federal Insurance Contributions Act (FICA) taxes

FICA taxes are split evenly between the employee and the employer. They include:

Social Security tax (6.2% from employees and 6.2% from employers)
Medicare Tax (1.45% from employees and 1.45% from employers)

Federal Unemployment Tax Act (FUTA) taxes

Under FUTA, employers pay a tax of 6% on the first $7,000 of wages per employee. You may also need to pay additional state unemployment taxes, depending on where your employee is based. To see a full breakdown of payroll taxes by state, check out our free US State Explorer tool.

link to Payroll taxes: How to manage them as an employer

Tax and Compliance —

10 min

Payroll taxes: How to manage them as an employer

Learn the basics of payroll taxes for your business, including types of payroll taxes and how to manage them.

What is income tax?

Income tax is based on the employee’s individual earnings, and is used to fund general government operations. Although it is paid fully by the employee, employers must withhold it from their employees’ paychecks.

Unlike FICA and FUTA taxes, the amount to be withheld depends on the individual. This is because, in the US, individuals can choose to be taxed alone or with their spouse. To know how much to withhold, you will need to ascertain your employee’s preference through Form W-4, and then calculate the tax based on their tax bracket.

Federal income tax is based on a progressive scale ranging from 10% to 37%. Some employees may also be required to pay state income tax and/or local income tax (which is applicable in some cities and counties).

Key differences between payroll tax and income tax

	Payroll tax	Income tax
Who pays?	Employers and employees.	Employees and business owners.
Purpose	Funds Social Security, Medicare, and unemployment.	Funds general government programs (defense, education, etc.).
Tax rate	Fixed (e.g., 6.2% Social Security).	Progressive (10%–37%).
Withheld?	Yes. Deducted from payroll.	Yes. Varies by income and W-4 elections.
Employer contribution?	Yes. Employers match certain taxes.	No. Entirely employee-paid.

What are the employer’s responsibilities for payroll and income tax compliance?

As the employer, you need to ensure that you:

Calculate and withhold the correct amounts

You can use IRS Publication 15 (Circular E) for federal withholding guidelines and check state/local tax rates. Alternatively, you can use payroll software like Remote Payroll that does all of this for you and ensures that you are withholding the right amounts.

File and pay the taxes on time

You must file tax returns and deposit payroll taxes on a set schedule (monthly, semi-weekly, or quarterly, depending on IRS requirements).

Federal tax deposits go to the IRS via the Electronic Federal Tax Payment System (EFTPS), while state and local tax deposits vary by jurisdiction.

Provide W-2s and 1099s

You must report the wages and taxes withheld to employees, independent contractors, and the IRS using the following forms:

Form W-2 (for employees): Due by January 31 each year.
Form 1099-NEC (for contractors): Also due by January 31.

link to Payroll tax forms: A beginner’s guide for US employers

Tax and Compliance —

7 min

Payroll tax forms: A beginner’s guide for US employers

If you have employees in the US, here are the relevant payroll tax forms you need to be aware of — as well as how you can simplify the entire form-filling process.

Stay up to date with tax changes

Tax laws change frequently, impacting payroll tax rates, deductions, and reporting requirements. It’s important to be aware that:

The IRS updates tax brackets annually.
States may change payroll tax rates (e.g., unemployment insurance).
New legislation (e.g., tax credits or relief programs) can impact employer obligations.

Remote Payroll ensures that you are always up to date with legislative changes and updates at all levels, and that you are always fully compliant at all times.

Navigating payroll taxes with Remote

Managing your payroll taxes correctly and on time is crucial for complying with federal and state tax laws. If you fail to meet deadlines or make mistakes on the forms mentioned in this article, you may face penalties, including fines and interest charges.

Mistakes can also lead to unhappy employees, delayed tax refunds, and extra work to fix errors. This is why it’s highly recommended to use a trusted payroll platform like Remote, which takes on all the heavy lifting. We also provide in-house guidance and advice, saving you time, money, and resources.

To learn more about how Remote Payroll can simplify your entire payroll process, speak to one of our friendly experts today.