Tel: (212) 300-5776 | Toll Free: 800-691-9214
Tel: (212) 300-5776 | Toll Free: 800-691-9214

Understanding Income Tax Vs Payroll Tax For Businesses

Understanding Income Tax Vs Payroll Tax For Businesses

The American Dream

Starting and operating your own business can be one of the most rewarding experiences in your professional life. After all, it is part of the “American Dream” and can allow you the ultimate flexibility and allows you to manage and operate the company according to your own vision.

However, there is a dark side to running your own business and it can lead to significant penalties. We are of course talking about handling your business's taxes. If you have ever been an employee then you know the deal - You show up to work (for someone else), a few weeks later you receive a paycheck, and the hard part is done for you… At the bottom of the paycheck, you can see what has withdrawn automatically for taxes, but most people, however, they just skip over this part and look at their actual take-home pay. 

The business owner on the other hand has already done all of the behind-the-scenes work. Let’s take a look at two forms of taxation that a business is responsible for. This is the income tax and the payroll tax.

Income tax

Income tax is usually the most significant form of taxation. There are income taxes on corporations and individuals alike. The income tax imposed directly on businesses is called the corporate tax and is currently 21% (down from 35% what it was before 2017).

Income tax on individuals is organized in the form of tax brackets. It can range from as low as 10% and increases up to 37% on the highest income earners. These scaling tax brackets are referred to as a progressive taxation system, since the more you earn the higher percentage you pay.

Most income tax is paid to the federal government, but there are also state income taxes in most states. This is usually much smaller and in almost all cases is less than 10%. Some states like Florida and Texas have no state income tax. 

If you are self-employed or an independent contractor, then you usually pay quarterly in advance, estimated tax payment of what you expect to earn each quarter.

It is very important to stay up to date on the estimated tax payments so as to not fall behind and receive fines and end up with a large tax bill.

Payroll Taxes

Payroll taxes are essentially made up of two different forms of federal taxes, FICA and FUTA.

FICA: Federal Insurance Contributions Act is a combination of Social Security and Medicare taxes that equal 15.3% of your employees’ wages. This is divided in half so 7.65% is paid by the employee and 7.65% is paid by the employer.

b>FUTA: Federal Unemployment Tax Act is an additional payroll tax that equals 6% of the employees’ wage. This tax is paid only by the employer and is part of the unemployment insurance system.

You are also responsible to pay to the IRS and state (in most cases) the income tax you withhold from your employee’s payroll. 

Running your own business can be difficult enough, but trying to worry about payroll taxes; income taxes; corporate taxes; withholding taxes; and estimated tax payments, can be an expensive nightmare to manage.

That is why one of the smartest and cost saving decisions you can make this year is to hire a tax and account professional to handle all of your business's taxes. It doesn't matter how many employees you have or how big your business is. You will be able to start saving money each quarter and have peace of mind.


Contact your local Empire Tax Professional office, located throughout Manhattan, Queens, Brooklyn, Long Island, & New Jerey

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