Understanding the Differences Between Payroll Tax and Income Tax
July 1, 2024
Many taxpayers mistakenly believe that payroll taxes and income taxes are the same thing. However, these two taxes are different and have their own unique rules and requirements. Employers and employees need to understand the difference between payroll tax and income tax to make sure they follow the law and protect their finances. This will help every taxpayer handle their tax responsibilities with clarity and confidence.
In Vietnam’s busy economy, many taxpayers find it difficult to tell the difference between payroll tax and income tax. But knowing how these two types of taxes work is important for both employers and employees. As we explore the world of payroll tax and income tax, let’s make these ideas easier to understand. Let’s take a closer look at these taxes and make sure everyone understands how they work in Vietnam.
Payroll tax and income tax explained
Income tax in Vietnam, known as Personal Income Tax (PIT), applies to residents on their worldwide taxable income, regardless of where it is paid or received. Employment income is taxed on a progressive basis, while non-employment income is taxed at various rates. For tax non-residents, they are subject to PIT on their Vietnam-sourced income only. Employment income is subject to the flat rate of 20% while non-employment income is tax at various rates similarly to tax residents.
Payroll tax in Vietnam refers to the compulsory insurance contributions that employers withhold from employees’ wages and pay to the government on behalf of their employees. These contributions fund specific programs like social insurance, health insurance and unemployment insurance.
Fast facts about payroll and income taxes in Vietnam:
- The typical payroll cycle is monthly, with salaries typically disbursed on the final working day or as stipulated in the employment agreement.
- For Vietnamese employees working in foreign companies, compensation must be no lower than the government-stipulated minimum monthly salary.
- In Vietnam, the responsibility for handling taxes for employees typically falls to the Human Resources (HR) department or the Accounting department within a company.
- Employees must be paid in Vietnam Dong. However, according to Section 2, Article 95 of the Labor Code 2019, expats’ salaries can be paid in forex currency.
What is the difference between payroll tax and income tax?
While both payroll tax and income tax are deducted from an individual’s earnings, they serve different purposes and are calculated differently.
| Aspect | Payroll tax | Income tax |
| Purpose | To fund social insurance programs like healthcare, social security, etc. | To fund public services and government functions. |
| Tax rate | – Social insurance: Employees contribute 8%; employers contribute 17.5% – Health insurance: Employees contribute 1.5%; employers contribute 3%. Unemployment insurance: Both employees and employers contribute 1%. ** Compulsory insurance applies to tax residents who sign a labor contract. | – Tax residents: (i) PIT at a flat rate of 10% tax for a resident who does not sign a labor contract from 2 million VND. (ii) Progressive tax rates ranging from 5% to 35%. – Non-residents: Subject to PIT at a flat rate of 20% |
| Employer responsibility | Employers must register and pay insurance contributions monthly on behalf of their employees. | Employers must withhold the required percentage of their employees’ income and remit it to the state treasury. |
| Employee responsibility | Employees contribute a portion of their salary to compulsory insurance programs. | Employees are responsible for ensuring they provide accurate information for tax calculations. |
| How It’s calculated | Salary base for insurance contribution is the monthly basic salary, allowance and other income. However, the salary base for social insurance and health insurance contribution is capped at 20 times of the common minimum salary and the salary base for unemployment insurance contribution is capped at 20 time of the regional minimum salary. | PIT payable = [Taxable income – Allowable deduction] x Tax rate |
The primary difference lies in how the funds from each tax are used by the government. Let’s break it down further.
Personal income tax vs payroll tax usage
Payroll taxes are specifically used to fund government programs such as Social insurance, Health insurance and Unemployment insurance. These taxes are automatically deducted from an employee’s paycheck and the employer also contributes a portion.
On the other hand, income taxes are levied on an individual’s income and are used to fund various government services, such as infrastructure, defense, education, and public welfare programs.
Difference between income and payroll tax rates
Income tax rates in Vietnam vary depending on an individual’s income level and residency status. For tax residents, the tax rates range from 5% to 35%, with higher earners paying a larger percentage of their income. Non-residents, however, are subject to a flat % tax rate of 20% on their Vietnam-sourced income.
Payroll taxes, also known as social security taxes, are calculated differently. Here’s a breakdown of the payroll tax rates in Vietnam:
| Insurance type | Employer contribution | Employee contribution | Note |
| Social insurance | 17.5% | 8% | Covers sickness, maternity, labor accidents, occupational diseases, retirement, and death |
| Health insurance | 3% | 1.5% | Provides coverage for medical treatment and hospitalization |
| Unemployment insurance | 1% | 1% | Only applicable to Vietnamese nationals |
Employee vs Employer taxes: Who pays what?
Payroll taxes, as mentioned earlier, are paid by both individuals and businesses on various forms of income. Employers are required to withhold payroll taxes from their employees’ wages and also pay a portion themselves. Self-employed individuals are responsible for paying the full amount of payroll taxes on their own.
How they are calculated
Payroll taxes are calculated as a percentage of the employee’s salary and are subject to certain caps. The actual amounts are subject to minimum and maximum salary bases defined by the government. A wage ceiling for calculation of insurance contributions is imposed at 20 times the common minimum wage for social and health insurance (Currently VND 36 million (US$1,527.27)) and 20 times the regional minimum wage for unemployment insurance.
Taxable income is calculated as income subject to PIT minus allowable deductions.
| PIT payable = [Taxable income – Allowable deduction] x Tax rate |
Tax residents are subject to PIT on their worldwide taxable income. Calculating salary for employees is taxed on a progressive basis with the following rates:
| Taxable Income per year (VND) | Tax rate |
| VND 0 – 60,000,000 | 5% |
| VND 60,000,000 – 120,000,000 | 10% |
| VND 120,000,000 – 216,000,000 | 15% |
| VND 216,000,000 – 384,000,000 | 20% |
| VND 384,000,000 – 624,000,000 | 25% |
| VND 624,000,000 – 960,000,000 | 30% |
| Above VND 960,000,000 | 35% |
Non-employment income is taxed at different rates depending on the type of income, such as:
| Type of income | Tax rate |
| Business income | 0.5% to 5% (based on the type) |
| Interest/dividends | 5% |
| Sale of shares | 0.1% (of sales proceeds) |
| Capital assignment | 20% (on net gain) |
| Sale of real estate | 2% (of sales proceeds) |
| Income from franchising/royalties | 5% |
| Income from inheritances/gifts/winning prizes | 10% |
Tax for non-residents at a flat rate of 20% on Vietnam-sourced employment income and at various rates for non-employment income, similar to the rates for residents.
While income taxes and payroll taxes often create confusion for many taxpayers in Vietnam. From their purpose and calculation methods to the responsibilities of employers and employees. By familiarizing yourself with the key aspects of payroll tax vs. income tax, you can take control of your tax obligations and make informed decisions for your financial well-being and your organization.
It’s important to ensure that these rates are current, as they can change with new legislation or policies. Always refer to the latest legal documents or consult with a tax professional for the most accurate information. For expert assistance in navigating Vietnam’s complex tax landscape, consider Talentnet’s comprehensive Payroll services and Personal Income Tax (PIT) services. Our experienced professionals can help you stay compliant, optimize your tax strategy, and achieve peace of mind in managing your payroll and income taxes.
