How Are Payroll Taxes Different From Personal Income Taxes?

Want to sabotage your new startup? Ignore tax regulations in your state.

While no one starts a business to worry about tax rules, it’s necessary to memorize them if you want to avoid fines at the local or federal level. How are payroll taxes different from personal income taxes?

Check out this guide to understanding the difference between payroll taxes and income taxes.

What Taxes Are Taken Out of Your Paycheck?

For a small business owner, the line between business and personal can sometimes get blurry. Operating as a sole proprietor, for example, can mean that you co-mingle business and personal income in one account.

In this case, any checks you receive from clients won’t have any personal taxes like social security and medicare taken out. But established business entities with employees are required to issue paychecks with certain taxes taken out.

These taxes for taxes for dummies are paid to your state government usually every quarter. First, each employee gets money taken out of his or her personal paycheck and then the business owner uses the money to mail a check to the local tax authority.

Keep in mind that whatever payment schedule you choose for payroll taxes with your local government, this is the schedule you have to maintain throughout the year. Suddenly switching payment frequency can lead to fines.

Notify each tax authority in writing when you need to make a change to your payroll tax payment schedule as seen in this article.

What Does Payroll Tax Cover?

Without payroll taxes, social insurance programs wouldn’t be possible. The only reason Americans receive social security payments at retirement is because of the contributions they made during their lifetime to social security.

Employees bear almost all of the payroll tax burden to ensure their financial future includes important health and retirement benefits. The sum of payroll taxes is around 7 percent per pay period.

These taxes make up almost 30 percent of local government revenue. This means business owners who miss payments won’t be treated with much leniency since the state government needs the revenue in order to thrive.

What About Income Taxes?

Now that you understand the importance of state payroll taxes, it’s important to learn about income taxes. For small business owners, you’re responsible for covering both your own payroll taxes and your own personal income taxes.

This is commonly known as double taxation. It makes your tax burden extreme unless you’ve got protections in place to minimize your tax liability.

Double taxation happens because taxes are owed to the federal government on the total amount of your earnings for the year. But if you’re a business owner, you already paid for your payroll taxes as an employee and an employer.

You pay for two roles plus your personal income taxes. Consult with an attorney to learn the best business structure to help you avoid double taxation.