Calculating tax is a complicated task. The last thing we all would want to do is to be on the wrong side of the law. Each law-abiding US citizen is expected to pay their taxes on time. Many a time, people get confused with the various taxes they have to pay. In this post, we are going to see the difference between payroll taxes and income taxes.
You could claim that you pay your taxes on time as your employer creates a pay stub regularly. Even if they are using an electronic paystub generator, there are many taxes that you are responsible to pay from your pocket. The best way to know and get your taxes calculated, either in person or through a w2 form online is with the help of a tax professional.
Payroll tax explained
Payroll tax is a mandatory US tax calculated by deducting a certain percentage of your gross pay for social security purposes. Here, both the employee and employer contributions to pay this tax. The tax proceeds go towards social security and health insurance purposes.
There are two components of the payroll tax – social security tax and Medicare taxes. Both are together also known as Federal Insurance Contributions Act (FICA) tax. Social security tax is calculated when your earnings reach a certain threshold while Medicare taxes depends on your salary structure.
Income tax explained
No pay stub maker calculates income tax. This is a tax you pay to the government from your pocket where you are responsible to pay for it. This also includes your other sources of income like dividends, interest earned, sale from real estate, etc. This is a tax that you pay to the government for its functioning. It consists of taxes at the federal, state, and local levels.
The amount of money you pay as income tax fluctuates based on how much you made per year. Also, the government’s guidelines play a role in how much you need to pay as income tax.
Things to keep in mind
If you feel there is a mistake in your pay stub, you can always check the stub maker or contact the payroll executive. On the other hand, the income taxes have to be done yourself or you have to assign this work to a tax professional.
You can take your payroll taxes for granted as it is your employer’s responsibility to pay them on time. On the other hand, if you miss your income tax payment for any financial year, you will have to face the consequences.
Payroll taxes will mostly remain consistent for longer periods. When you are spending your money, do ensure you save a significant amount for your tax payments. If you have made a big purchase or sale during the calendar year, this point is all the more important.
Lastly, look up the various taxes you have to pay and the government rules you have to adhere to so you know what the Government expects from you.