Are you confused about the difference between payroll tax and income tax? As someone who has never filed taxes before, it can be overwhelming to stay on top of all the tax terms that get thrown around in the media and by the government. But understanding the differences between payroll tax and income tax is essential to ensuring you're not paying more than you owe.
Payroll tax is a tax that your employer withholds from your paycheck to fund social security and Medicare programs. Depending on how much you earn, the percentage of your paycheck that goes towards payroll tax can vary from 6.2% to 7.65%. This tax is separate from your income tax, which is determined based on how much you earn in total throughout the year.
Income tax is a tax on your total income, including earnings from your job, investments, or any other source of income. Unlike payroll tax, income tax rates are progressive, meaning the more you earn, the higher your tax rate. Depending on how much you earn, your income tax rate can range from 10% to 37%.
So, what does all this mean for you? As someone who has never filed taxes before, it's important to understand that you may owe both payroll tax and income tax. If you work a traditional job, your employer should be withholding the correct amount of payroll tax from your paycheck. However, it's still your responsibility to make sure your income tax is paid on time.
If you're self-employed or work in the gig economy, you'll have to pay both the employer and employee portions of the payroll tax. This can add up quickly, so it's important to set aside money each month to cover this tax expense. Additionally, you'll need to make quarterly estimated tax payments towards your income tax. Failing to do so can result in penalties and interest charges.
While understanding the differences between payroll tax and income tax can be daunting, there are resources available to help you navigate the process. The IRS has a wealth of information on their website, and you can also seek the help of a tax professional if needed.
Understanding payroll tax versus income tax is crucial to staying on top of your tax responsibilities. While it may seem overwhelming at first, breaking down these different tax terms and their implications can make the process less daunting. Stay informed and seek out resources to make tax season less stressful and more manageable.
For more information, here is 7 Secrets The IRS Doesn't Want You to Know
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