What's the Difference Between Payroll Tax and Income Tax?

Payroll tax and income tax are both taken out of your paycheck, but they fund different programs and are calculated differently. Income tax is calculated based on your total taxable income for the year and goes into the general federal budget. Payroll taxes are a flat percentage of your wages that go specifically to fund Social Security and Medicare — employees pay 6.2% for Social Security (up to the $168,600 wage cap in 2024) and 1.45% for Medicare, and employers match those amounts. Unlike income tax, payroll taxes don't take your personal situation or deductions into account — everyone pays the same flat rate regardless of family size or other income. Lower-income workers often pay more in payroll taxes than in income tax, which is why credits like the Earned Income Credit were designed in part to offset the payroll tax burden.