Complexities And Importance Of Payroll Taxes Compliance

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Payroll is not only about employees getting paid. The process requires both the worker and the employer fulfill several responsibilities – and compliance with payroll taxation is one of the top ones for both. TMF Group USA’s HRP Manager explains how payroll taxation works in the US and how local knowledge is vital for compliance risk mitigation.

When it comes to payroll it does not matter if your company has 15 employees or 500, you need to stay on top of your legal and regulatory responsibilities. But payroll isn’t just about paying your employees. Every employer is responsible for paying their portion of payroll taxes, making federal tax deposits and filing reports with various state and local agencies, among other things. Likewise, workers are also responsible for their portion of payroll and individual taxes. In the US these contributions represent a significant amount of money for average wage earners.

The average single childless worker in the United States had a 31.5% tax burden (or tax wedge) last year, meaning they paid $17,372 in taxes in 2014, with $8,631 in individual income taxes and $8,741 in payroll taxes (from an average annual income of $50,084). This is 4.5% less than the burden for the average OECD worker and lower than most of Europe - only Britain, Ireland and Switzerland have lower tax wedges, and most European countries tax labour at 40% or above. On average, the tax burden for families in OECD countries is 25.9% lower than that for childless workers.

Still, the total tax burden in the US ranks as the 24th highest in the OECD; the lowest total tax rates on labour are found in Chile (7%) and New Zealand (17.2%). In 2014 the burden increased in 23 of the 34 member countries.

US taxation of wage income

The two major types of taxes that workers in the US pay are payroll and individual taxes.

Payroll taxes

The US imposes two separate payroll taxes on income: a 12.4% tax which is used to fund Social Security, and a 2.9% tax to fund Medicare. Although both taxes are split evenly between employers and employees, the worker ultimately pays this tax through lower take-home pay.

Many OECD countries have high payroll taxes; France, for example, places the highest payroll tax burden of 37.9 percent on average workers.

Individual taxes

The federal income tax has a progressive rate structure ranging from 10% to 39.6%. On top of this, local government in 17 states also impose an individual income tax.

The tax wedge of 31.5% includes these two taxes and rises progressively with income, with the wealthiest paying one-third of their income to the federal government. One exception is the 32 million “poor Americans” that benefit from the Earned Income Tax Credit; they pay zero taxes and can receive rebates.

Make sure your payroll processing is securely managed

Running payroll – and especially if it’s across state or international borders in one or multiple jurisdictions - can be a difficult, time-consuming task, soaking up hundreds of hours of time to interpret legislation and prepare foreign documents. Every company should make sure the full scope of payroll processing is securely managed from start to finish, mitigating compliance risk.

Whether you are already in or want to set-up in the US - or any other place in the world - you can trust TMF Group. Unlike other service providers, our people are based in-country. We have more than 1000 HR and payroll specialists in more than 80 countries around the world. As well as being a credible recognised supplier, fully accredited and compliant with legal and industry standards, we have the people on the ground that really understand the nuances of your local market, local currency and local dialect.

But don’t just take our word for it. In 2015, the Everest Multi-Country Payroll PEAK Matrix rated TMF Group as a major contender globally and the strongest provider of payroll in Latin America. Our robust risk management framework, know your client and anti-money laundering processes all add that extra tier of reassurance which, coupled with our consistently strong D&B rating, means that you can confidently place your business with a financially secure and trustworthy partner.