Payroll Taxes Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Payroll taxes are of two types: they are either taxes that must be paid by an employer (employer payroll taxes) or they are taxes employees must pay (employee payroll taxes). The requirement to withhold taxes from the wages or salaries paid to employees forces employers to deduct the taxes that are owed by each employee before wages or salaries are paid. This practice makes the employer the government’s tax collector. Both employer and employee payroll taxes are usually simply lumped together and called payroll taxes because they are all handled as a part of the calculations needed by an employer to meet payday obligations.

United States

Employer payroll tax obligations are usually generated with a formula directly related to the amount of money an employee has earned. For example, employer payroll taxes in the United States require paying a matching portion of the employee’s Social Security taxes (6.2 percent up to the annual maximum), Medicare taxes (1.45 percent of wages or salary), federal unemployment taxes (FUTA), and state unemployment taxes (SUTA).

The FUTA tax rate for employers is 6.2 percent of gross compensation for all employees on the first $7,000 of income. However, because a business must also pay SUTA taxes, it is allowed to take a 5.4-percent SUTA credit on its FUTA obligation. This reduces the net tax owed for FUTA to 0.8 percent; however, because SUTA rates vary between states, the amount owed as an employer payroll tax varies. In addition, employers usually have to pay an unemployment compensation tax.

Employers may also be liable for local taxes calculated on the basis of their employment activities. Sometimes, employers may have taxes levied upon them based on the number of workers they employ on a fixed or variable formula. Additional tax burdens such as business income taxes, inventory taxes, or property taxes may be owed, but these are not payroll taxes.

Taxes that are withheld from wages (hourly earnings) or salaries (payments on a nonhourly basis) are paid on either a pay-as-you-earn (PAYE) or pay-as-you-go (PAYG) basis. Employers in the United States are usually responsible for withholding the following taxes: federal income taxes, Social Security taxes (6.2 percent up to the annual maximum), Medicare taxes (1.45 percent), state income taxes (if applicable), and local taxes (such as city, county, school district, state disability, or unemployment insurance), if applicable.

Payroll taxes on the wages or salaries of individual workers or employees are calculated on their gross earnings unless there are tax provisions that allow for pretax exclusions. Contributions to 401(k) and 403(b) plans may be paid with pretax dollars. These exclusions are part of a policy goal that seeks to promote personal savings for retirement. Employers may allow employees to deduct a wide variety of deductions for union dues, stock plans, life insurance premiums, health plans, uniforms, meals, and other items. These last deductions are voluntary payroll deductions and are not payroll taxes.

Generally, an employer reports total payroll taxes by calculating the gross earnings and then deducting the various payroll deductions to arrive at the employee’s net pay. The biggest portion of payroll taxes are the Federal Insurance Contributions Act (FICA) taxes. The FICA tax is a combination of Social Security taxes and Medicare taxes. Both the employer and the employee pay these taxes with each paying half of the amount due. The total for both combined is 15.3 percent.

Other Countries

Payroll taxes vary across the world. In Australia, the employer payroll tax is a specific tax paid by the employer for each worker. The tax is paid to the states and territories. The only employee payroll tax deduction is for Australian medical care. Mexico also has a similar state focus for its payroll tax collections. Canada has both Canadian federal payroll employee tax deductions as well as provincial deductions. A common Canadian payroll employer tax is for health insurance for employees.

In Great Britain the HM Revenue & Customs (HMRC) system is a PAYE system that requires employers to deduct income taxes and National Health Insurance contributions (NIC) from employees’ wages. In addition, employers pay taxes as contribution to NIC for sick leave, maternity leave, and other types of family leave. Historically, payroll taxes in Europe have been much higher than in the United States. While producing a successful social safety net, high tax rates have interfered with job creation. Since 2000, payroll tax rates in Europe have declined, allowing payroll taxes to be invested in new enterprises.

The new Russian civil code mandates a number of payroll taxes. Employer payroll taxes must be paid to the Pension Fund, the Social Insurance Fund, the State Employment Fund, and the Compulsory Medical Insurance Fund, plus a transportation tax and an education tax that are also based on wages. Unlike in the United States where individual taxpayers are responsible for taxes on dividends paid to stockholders, in Russia employers are required to withhold taxes on dividends and on other forms of compensation.

Payroll taxes are relatively new and relatively low in Africa. They are often called an enterprise tax, which is levied to fund training of workers. South Africa collects a uniform levy for employee training activities. However, its payroll tax burden is greater in its six metro areas than elsewhere because the system is still in development. In Latin America the social insurance program is paid for with payroll taxes. In addition, other taxes such as income taxes may be collected. In Brazil, a payroll tax is collected to finance education with a tax burden for employers of about 40 percent and only 15 percent for employees. In Asia, social security programs are financed with payroll taxes. In addition, unemployment insurance and injury compensation payroll taxes are collected.

Bibliography:

Steven M. Bragg, Accounting for Payroll: A Comprehensive Guide (Wiley, 2004);
CCH State Payroll Law Handbook (CCH Inc., 2001);
Peter B. Dixon, Mark R. Picton, and Maureen Rimmer, “Payroll Taxes: Thresholds, Firm Sizes, Dead-Weight Losses and Commonwealth Grants Commission Funding,” Economic Record (v.80/250, 2004);
Adriana Kugler and Maurice Kugler, Labor Market Effects of Payroll Taxes in Developing Countries: Evidence From Colombia (National Bureau of Economic Research, 2008);
Dennis Lassila, Bender’s Payroll Tax Guide 2008 (Lexis Nexis Matthew Bender, 2008);
Joanne MitchellGeorge, American Payroll Association Basic Guide to Payroll (Wolters Kluwer Law & Business, 2004);
Joel Slemrod and Jon M. Bakija, Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes (MIT Press, 2008);
Mark Stabile, “Payroll Taxes and the Decision to Be Self-Employed,” International Tax and Public Finance (v.11/1, 2004);
Taxing Wages 2006–2007 (Oced Publishing, 2007).

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