Payroll Tax vs. Income Tax

Payroll taxes generally fund programs such as Social Security, Medicare, and unemployment, while income taxes are based on taxable income and help fund broader government operations. Both can affect an employee’s paycheck, but they are calculated and reported differently.

Employers withhold certain taxes from employee wages and may also owe employer payroll taxes of their own. Federal income tax withholding is based largely on the employee’s Form W-4 and taxable wages, while Social Security and Medicare taxes follow separate rules. State and local requirements can add another layer, so payroll systems need to apply the correct tax to the correct wages.