While payroll tax and income tax may appear similar, they have very different implications. As you expand, understanding these is key to protecting your organization from hefty financial penalties and mitigating regulatory risks.
In this article, we delve deep into the differences between payroll tax and income tax, exploring how these vary from country to country and providing your company with the strategic insight needed to navigate these challenges effectively.
What is payroll tax?
Payroll taxes are the taxes employers and employees must pay based on the employee’s wages, tips, or salaries. Employers withhold a portion of an employee’s earnings from their paycheck and contribute an additional percentage.
Depending on the country, these taxes are used to fund essential government programs, such as retirement, healthcare, unemployment, and other social programs.
How payroll taxes differ from country to country
Payroll taxes are based on the countries in which you operate, and they fund social programs that are specific to those nations. In the following examples, we explore how three different countries across the globe structure their payroll taxes and the government programs they support. For information about other countries, check our employment guides.
The United States
In the United States, payroll taxes fund key social programs like retirement, healthcare for seniors and the disabled, and unemployment.
Both employers and employees contribute to the Social Security Tax, with the employer withholding 6.2% of the employee’s wages and contributing the same amount for a combined total of 12.4%. This tax supports employees’ retirement, and as of 2024, employees earning more than $168,600 will not be taxed for Social Security above that threshold.
The employer also withholds 1.45% of the employee’s wages for the Medicare Tax and pays an equivalent amount, totaling 2.9%. The Medicare Tax goes toward funding hospital insurance for seniors and individuals with disabilities. Employees who earn more than $200,000 pay an additional 0.9%, but this doesn’t apply to employers.
On the other hand, the Federal Unemployment Tax (FUTA) is solely paid by employers. FUTA is 6% on the first $7,000 of each employee’s wages. There’s also the State Unemployment Insurance (SUI) tax that varies by state.
China
In China, social security contributions fund retirement, unemployment, medical, work-related injury insurance, and the Mandatory Housing Fund.
For the pension contribution, employers withhold 8% of the employee’s income and pay a portion of 16%. The Medical Insurance contribution is 10% of the employee’s earnings for employers and 2% for employees. Additionally, both the employer and the employee contribute 0.5% of the employee’s salary toward unemployment insurance.
The Work-Related Injury contribution is only paid by the employer and ranges from 0.16% to 1.52%, depending on the location of the employee.
The mandatory Housing Fund contribution is shared by the employer and employee, with each paying between 5% to 25%, which is also based on the location of the employee.
South Africa
In South Africa, payroll taxes primarily support two key programs: the Unemployment Insurance Fund (UIF) and the Skills Development Levy (SDL). For the UIF, the employer and employee contribute 1% of the employee’s income. However, the SDL is an employer-only contribution set at 1% of the employer’s payroll.
Income tax
Income taxes are the taxes employees must pay based on their gross income. As an employer, you’re responsible for withholding the correct amount from each employee’s paycheck and remitting it to the government.
Unlike payroll taxes, which are generally fixed percentages, income taxes are often progressive in many countries. This means that employees with higher incomes are taxed at higher rates.
For global teams, income tax rates and regulations can vary significantly from country to country, adding another layer of complexity to managing international payroll.
Using the same countries from above, we’ll highlight the variations in tax structures for the United States, South Africa, and China. You can, again, check our employment guides to learn about other countries.
The United States
In the United States, federal tax rates range from 10% to 37%, broken down into individual tax brackets. For example, in 2024 an individual earning between $44,726 and $95,375 is taxed at a 22% rate, while someone with an income between $11,001 and $44,725 is taxed at 12%.
On top of federal taxes, each state imposes its own income tax rates, but not all states mandate one.
States that don’t have an income tax include: Texas, Florida, Alaska, Nevada, South Dakota, Tennessee, Washington, and Wyoming.
China
China’s income tax rates range from 3% to 45%, and they’re organized into income brackets similar to those in the U.S. For example, employees earning between 144,000 CNY and 300,000 CNY are taxed at 20%, and employees with incomes between 660,000 CNY and 960,000 CNY have a 35% tax rate.
South Africa
South Africa’s income tax rates start at 18% and reach up to 45% for the highest earners. For example, employees who earn less than ZAR 226,000 are taxed 18%, and employees who make between ZAR 488,701 and ZAR 641,400 have an income tax rate of 36%.
How to simplify global payroll and compliance
Processing payroll across multiple countries can be complicated and time-consuming. To avoid costly penalties and ensure compliance, you can end up spending hours manually managing complex regulations and navigating different payroll solutions.
Multiplier’s global payroll solution provides an easier alternative. Our smart, compliant, fully managed payroll calculates multi-country tax, benefits, and compensation so you don’t have to. And, in a single dashboard, you can issue payslips customized to the local language, manage expenses, and view detailed reports.
Take control of global payroll. Schedule a demo with one of our experts today.
