How The Payroll Tax Effects Employers And Employees

payroll tax

The payroll tax is an ambiguous penalty for hiring someone, and worst of all it increases as you pay workers more. Anyone who has been in the position of signing the FRONT of a paycheck may not realize how what payroll tax effects really are.

Look at your paystub….See the line for FICA and MICA?  This is a payroll tax that comes out of your paycheck to fund Social Security and Medicare, and they add up to 7.5% of your paycheck.  If you are under the age of say 60, you will never see this money, let me repeat, you will never see this money.

What you don’t see is, if you are an employee, your boss is also paying the same amount in FICA and MICA taxes.  Yes, your paystub only reflects half of the cut today’s retirees take out of every dollar you earn.

So here is a more visual look:  If your gross paycheck is $1000, MICA and FICA take $75 from you, and by the way that is even before you pay a cent of income tax.  Meanwhile, your employer also pays $75 in MICA and FICA.  What that means is that your employer is paying $1075 to have you as an employee for that given time period.  The employee (before income taxes) is pocketing only $925, which amounts to a 16.5% payroll tax to your employer.

To add to this burden, federal law also requires the employer to pay for unemployment insurance for their workers.  States administer this program so rates vary, but typical costs for this nationwide range from 2-6%, with 4% being a good average.  So for your $1000 a week employee add another $40 a week for unemployment insurance and now employers are paying $1,115 for that employee to take home $925, before income taxes.  This discourages growth, so the employer is encouraged to look for alternate methods of getting tasks completed if every $1000 employee costs them $1115, which by the way is $460 extra per month, per employee.

The motto is, if you tax something you get less of it!  Why is it that governments propose taxes on tobacco and sodas?   They want to raise the price of bad behavior in order to get less of it.  Taxing employment has the same effect.  If we truly want to stimulate hiring, we have to curb these taxes.  For employers, they may find it cheaper to outsource your particular function to a different firm, or find a software program that will automate your process.  So the payroll tax keeps small businesses from growing, it hurts the employer who forgoes the potential for more profit, it hurts the would be employee (who is still out of work) and lastly consumers, who NOW have one less option.  Yay, payroll tax effects!

So, if you are a w2 employee looking at this article because you are interested in minimizing your own tax burden, consider getting a copy of Lower Your Taxes – BIG TIME! 2017-2018 Edition: Wealth Building, Tax Reduction Secrets from an IRS Insider. Its not exactly the most serious work, but with a title like Lower Your Taxes – BIG TIME – you pretty much can’t go wrong. It sells for something like 16 bucks on amazon, so check it out.

Share this post:


  1. Kaathy says:

    Ahh, finally someone else who understand how the payroll taxes work. Many people don’t understand that behind the minimum wage rhetoric is the fact that the government wants workers to earn more, not because it is good for the workers, but because it is good for the government. If Walmart or a fast food company raises the employee wages, the employee pays more income, FICA and FUTA tax, but the share of the FICA and FUTA paid by the employer increases as well. So the government has more money to supposedly fund those accounts. But we all know how good the government is in managing Social Security, Medicare etc. don’t we! It’s good to see someone else has that understanding.

    • Jim says:

      Well said Kathy, you must be a small business owner! You are so right, those interested in raising the minimum wage have an alternative motive, they just use the working man as a prop. These are the same sinister individuals who changed our healthcare industry!

Leave a Comment