The Dirty Little Secret of Small Business Payroll and Taxes

It’s that time of year again when we hear politicians talking about tax cuts for the working poor and middle class. They promise Uncle Sam will take less from us and somehow, almost if by magic, we will have more take-home pay without sacrificing the government services we have become so dependent on. Still, nothing ever changes. Why? Because there’s a dirty little secret about small business payroll and income taxes that most people do not know about.

When politicians talk about tax reductions, they are almost always referring to income tax. They are talking about the income tax collected by the IRS and individual state governments. What they don’t tell you is that the amount assessed for income taxes is only a small part of a much larger tax pie.

According to Tax Policy Center senior fellow Roberton Williams, 44% of all U.S. households will end up with no income tax liability at the end of this year. That means when all is said and done – tax returns have been filed and refunds have been issued – nearly half of U.S. taxpayers will not pay a single penny in income tax. Yet they are still paying taxes.

Social Security and Medicare Taxes

The dirty little secret of small business payroll and income taxes is as follows: most of us will pay more in Social Security and Medicare taxes than income taxes during our lifetimes. Using Williams‘ number as a base, the average Social Security and Medicare liability for households earning $50,000 is $7,650 per year. Half of that comes directly from a worker’s paycheck while the employer pays the other half.

Williams maintains that workers ultimately pay the entire bill themselves. He bases that assertion on the assumption that employers would pay their workers the difference if they did not have to pay their portion of Social Security and Medicare taxes.

Remember the previous statistic that suggested 44% of all U.S. households will pay no income tax this year? Here’s another one to chew on: Williams says just over 62% will end up paying more payroll taxes than federal income taxes this year.

Entitlement Programs Cost Money

Next time you hear a candidate talking about reducing taxes on the working poor and middle class, remember the dirty little secret of small business payroll and income taxes. The candidate is only talking about income taxes, not Social Security and Medicare. Both programs are entitlement programs that cost a tremendous amount of money to maintain.

We call Social Security and Medicare ‘entitlements’ because they have been established to provide government benefits to people who are entitled to them by virtue of meeting a particular set of conditions. The nature of entitlement programs is such that they are nearly impossible to get rid of once they have been implemented. Even making a few simple changes intended to streamline those programs and make them more efficient are met with resistance. Therefore, the government must keep collecting large volumes of revenue to keep the programs going.

What Small Business Owners Should Know

There’s not a whole lot we can do about how Social Security and Medicare taxes are calculated without completely overhauling both programs. But there is something small business owners can do to ensure payroll compliance. They can contract with a small business payroll provider with the knowledge and expertise to correctly calculate income, Social Security, and Medicare taxes, and to make sure all of them are paid on time. It is the least small business owners can do to make sure employees are taken care of.