As a small business owner, you know running payroll involves several moving parts--all requiring time and attention to keep things humming along smoothly.
This includes deducting withholdings for federal, state, and, where applicable, local governments, as well as carefully keeping transaction records and pay stubs.
Honestly? That’s a lot to do. Especially when you factor in your tax responsibilities as an employer.
Small business owners must not only withhold their employees’ payroll and income tax payments (and make sure they get to the correct government offices with the necessary forms), but they must also pay employer-specific payroll taxes toward Medicare, Social Security, and federal and state unemployment funds. (Not to mention budget for withholdings and remit them on the correct calendar dates.)
Keeping up with the many moving parts of payroll—and specifically the different requirements between income vs payroll tax—can get complicated.
We can help. Below, we break down payroll taxes vs. income taxes and how small business owners can work to stay in good standing with Uncle Sam.
What Is the Difference Between Payroll and Income Tax?
Employers and employees should take time to understand the difference between payroll and income tax to help make sure paychecks and tax payments are accurate.
Income tax is the tax employees pay on their taxable income, including their wages. The amount varies from person to person. Federal income tax can range from as little as 10% to as high as 37%. The amount the employer withholds from a paycheck typically depends on how the employee filled out their W-4 Form, which includes things like their filing status and allowances.
A major difference between income vs. payroll tax is that income tax calculations depend on individual employee inputs.
Payroll taxes are based on employee wages. These taxes fund programs like Social Security, Medicare, federal unemployment insurance (FUTA), and sometimes state-level unemployment insurance (SUI).
- Employees have payroll taxes withheld from their paychecks for Social Security and Medicare (also known as FICA).
- Employers match the employee’s FICA contribution. Employers also pay FUTA and SUI, which are employer-only payroll taxes.
Employees will see deductions from their checks, while employers are responsible for matching certain taxes and paying others fully.
What Are Payroll Taxes?
Payroll taxes refer to specific federal and state taxes that employers and employees are responsible for paying. Some of these funds come from the employee’s paycheck, and some are paid directly from the employer’s budget. In either case, the employer is responsible for sending payroll taxes to the correct government authority.
Here’s how this breaks down:
- Social Security Tax: Both employer and employee pay 6.2% on taxable wages to cover retirees (and others who are eligible to receive benefits).
- Medicare Tax: You and your employee will each be responsible for covering 1.45% of taxable earnings, funding medical coverage for adults 65 years of age or older and younger people with disabilities.
- FUTA (or the Federal Unemployment Tax Act) is a federal tax that employers pay to cover benefits for workers who’ve been let go. For the employer, this is 6% on the first $7,000 of each employee’s wages.
- State Unemployment Tax (aka SUTA or SUI): In most states, the employer is responsible for this tax that covers the short-term needs of unemployed people. The rate varies by state. Check your state’s tax requirements here.
What Are Income Taxes?
While processing payroll, the employer should automatically deduct federal, state, and, where applicable, local income taxes from each paycheck. The actual amount will depend on the information the employee submitted on their W-4—details like whether they’re married or have children, or other dependents, make a difference in the final number.
All employees must fill out a W-4 form. As an employer, you should keep this document in a safe place. You’ll use the information here to calculate the exact sum to withhold based on each worker’s details, then report and deposit it to the proper authorities.
Federal Income Tax
You need to withhold federal income tax from your employee’s paycheck to fund needs like educational resources and environmental protections. The exact amount you will deduct depends on how much each employee makes and whether they can claim any deductions.
State Income Tax
You might need to withhold state taxes depending on where your business is located or where your employees work. Forty-one states require some form of state income tax. On the other hand, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, don’t require state income tax payments.
Local Income Tax
While some municipalities don’t have specific taxes, others have their own individual income tax obligations. This is in addition to state and federal taxes. Be sure to double-check your state and city tax ordinances to ensure you’re on top of what’s required of you as an employer.
Use our free paycheck calculator to get help estimating take-home pay for hourly employees.
Payroll Tax versus Income Tax: Key Differences Explained
Below, we’ll compare payroll taxes vs income taxes in a bit more detail.
Who Pays Each Tax?
Here’s the thing: it falls to both the employee and the employer to cover payroll taxes, while the employee pays their income tax. The employer needs to deduct the correct amount from each paycheck based on the employee’s W-4 information.
For sole proprietors or independent contractors (or anyone else who is self-employed), the process is a little more complicated. You’ll likely pay estimated income tax and self-employment taxes every three months, as well as file your annual tax return.
How Are They Calculated?
Your employee pays income taxes on their taxable wages depending on several factors, including which tax bracket they fall into, how much they make, and where they work. Payroll taxes are a little simpler and use a flat rate.
Using a payroll service to help you calculate payroll deductions can make payroll and payroll tax management easier. An online payroll service like SurePayroll® By Paychex can help automate payroll for your small business so you can worry less about taxes and focus more on your customers.
Income Tax
The U.S. calculates how much an individual owes in income tax based on a progressive system. Basically, people are divided into certain tax brackets depending on income within a certain range, then taxed a higher rate on whatever is earned over that range.
The following example uses a single filer in 2025.
For example, if your employee’s salary is $125,000, they’d be taxed at 10% for the first $11,925 of their income (the lowest tax bracket), then 12% for income between $11,926 and $48,475, then 22% for the portion they earn between $48,476 and $103,350, and finally taxed at 24% for the remaining $21,650 of their salary—the bit that pushes them into the next tax bracket.
Their filing status (for example, whether they’re filing jointly or separately from their spouse, or whether they support children or younger siblings) can impact their taxable income range, as well.
Another thing to note: States and local governments have their own tax systems. You might pay a progressive or flat tax rate—or no state income tax at all—depending on where your business or your employees are located.
Payroll Tax
Payroll taxes are based on employee wages and a few other key details about your business. For example, state unemployment tax rates depend on factors like how long your business has existed and how often you’ve had to lay off employees. Payroll taxes utilize a flat tax rate, which can make calculations much simpler. (Nice!)
Let’s say you need to calculate the payroll taxes for an employee with a $125,000 salary. Here’s how it could break down:
The employee makes $2,403.85 gross pay a week, which means:
- They’ll pay $34.86 (1.45%) for Medicare Tax
- And $149.04 (6.2%) for Social Security Tax
- In total, your employee owes $183.90 a week in payroll taxes, or approximately $367.80 if you use a bimonthly payment schedule.
If, for example, you’re a new small business owner in Florida. Here’s how the employer portion of payroll taxes would look in the case of a salaried employee making $125,000 a year:
Take the $2,403.85 gross pay a week, and calculate:
- $34.86 (1.45%) for Medicare Tax
- $149.04 (6.2%) for Social Security Tax
- $14.42 (0.6%) for FUTA tax
- $64.90 (2.7%) for state unemployment taxes
The employer is responsible for $263.22 a week, or approximately $526.44 bimonthly.
You can use our free paycheck calculator to help you estimate take-home pay for salaried employees.
Where Does the Money Go? (Federal Programs vs General Revenue)
When comparing payroll vs income tax, a key difference is what each tax supports.
Payroll taxes focus specifically on the programs they support: Social Security, Medicare, and unemployment.
Meanwhile, federal income taxes fund the government in general as well as a variety of programs—such as national defense and security, veteran benefits, Supplemental Nutrition Assistance Program, and research.
State income taxes fund things like public schools, libraries, fire departments, road maintenance, and other forms of public service.
Reporting Differences
There are several forms employers will use to report and pay these taxes.
- Form 941: Employer’s Quarterly Federal Tax Return. Use to report employee wages, salaries, and tips, due April 30th, July 31st, October 31st, and January 31st
- Form 944: Employer’s Annual Federal Tax Return. For employers who paid their employees $1,000 or less for the year.
- Form 940 Employer’s Annual Federal Unemployment Tax Return. Employers use this to report their annual FUTA payments.
- Form W-2: Wage and Tax Statement. Employers provide this to all employees by January 31 of the following year, to summarize all tax withholdings for the previous year.
- Form W-3: Transmittal of Wage and Tax Statements. This is a summary of all the employees’ tax and payment records made by the employer and sent to the Social Security Administration by January 31 of the following year.
You can deposit taxes to the proper authorities on a monthly or semi-weekly basis through Electronic Federal Tax Payment Systems (EFTPS), Direct Pay for businesses, or through your business tax account.
Why It’s Critical for Employers to Understand Payroll and Income Taxes
Understanding your role as an employer is vital for the well-being of your employees. If you want to give your employees an accurate paycheck, you’ll need to keep tax forms updated, account for withholdings, and save and organize pay stubs.
In addition to building trust with your team members, being careful with tax information might help avoid steep penalties that many small businesses could struggle to pay.
But it’s easier said than done. Maintaining timely communication with the IRS and state and local tax authorities requires following the deposit and filing dates closely, keeping detailed and organized records, and copies of deposits and forms.
That’s a lot of paperwork (and a lot of double-checking government fine print)! If you’d rather not spend time poring over forms and numbers, consider using a payroll service that can automatically calculate, withhold, and pay income and payroll taxes for you.
How SurePayroll Helps Businesses Manage Payroll and Income Taxes
This is where SurePayroll® By Paychex can come in. For over 25 years, we’ve helped businesses like yours thrive by helping them take care of the ins and outs of payroll--including income tax and payroll taxes—leaving you more time for building your business, training your team, and fine-tuning your business plan.
Make payroll (and payroll taxes) the easiest thing on your to-do list. Get simple, fast, dependable payroll services with SurePayroll.
