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Payroll vs. Income Tax What Are the Differences

  • March 11, 2022
  • 3 min read
Payroll vs. Income Tax What Are the Differences

With tax returns due in October of 2022, it’s always important for both citizens and businesses to refresh their memories on tax definitions. Something that often gets mixed up is the difference between payroll taxes and income taxes.

So what are the differences between payroll vs. income tax? What does each of them entail?

That’s what we’re here to look at today. Read on to find out more about the two types in this income and payroll tax guide.

Payroll Tax and Income Tax: Definitions

Payroll taxes are general-purpose taxes assessed on the wages paid out to employees. This happens when the wage bill for an employer exceeds a specific amount. 

That amount, or threshold, depends on the state or territory. These taxes are often used to fund public programs.

The federal government imposes income taxes based on the taxable income of Australian individuals or corporations. It’s a progressive tax, meaning the more you earn, the more you’ll be taxed.

Payroll vs. Income Tax: The Main Differences

The biggest difference between payroll and income taxes is about who actually pays them. For payroll taxes, both the employer and the employee pays. The employer, on the other hand, pays income taxes.

Payroll and income taxes also differ in their categories. We mentioned how income taxes are progressive, meaning the amount you pay is concurrent with how much you earn.

Payroll taxes are regressive, meaning everyone pays the same amount. Depending on how much you earn, these taxes might hit your wallet harder than income taxes.

The richer you are, the less you’re technically paying relative to others. This also makes calculating and processing income taxes harder since each person will occupy different tax brackets.

How Is Payroll Tax Calculated?

Payroll taxes take someone’s gross taxable wages and subtract any relevant deductions. That amount is then multiplied by the tax rate, which varies based on the region. The result is your payroll tax.

Sometimes employers find calculating payroll tax to be too time-consuming. If you go to payrollserviceaustralia.com.au, you’ll be able to save time through reliable payroll services. 

How Is Income Tax Calculated?

Income tax is calculated in much the same way as payroll taxes, though there is a key additional step that must be taken. First, you need to find your taxable income by subtracting any deductibles from your income earnings.

Once you do that, you’ll need to look at your specific tax rate. As we mentioned, each tax bracket has a different rate. Once you do so, you can multiply your taxable income by that rate.

There’s also a chance that you claim some sort of government rebate or tax credit. This must be taken into account beforehand. Medicare levies might also apply depending on your situation. 

Understanding Payroll and Income Taxes

Comparing payroll vs. income taxes and analyzing their differences is crucial if you want to pay the right amount each year. Use this guide to help you understand the key differences and file error-free today!

For more informative articles on finances and other topics, check out the rest of our site.

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