In the constantly evolving landscape of taxation, employers are always seeking ways to minimize payroll taxes while staying compliant with regulations and still providing valuable benefits to their employees.
With the advent of the 2024 tax year, new opportunities arise for employers to optimize their tax liabilities and reduce payroll taxes, with a little additional help from Edenred’s Claims Reimbursement and Commuter Benefits programs.
Why Are My Payroll Taxes So High?
Payroll taxes are an essential component of every employer’s financial responsibility. However, many find themselves questioning why their payroll taxes are so high.
Several factors can contribute to this and understanding them can shed light on what can be done to improve matters.
1. Social Security Tax and Medicare Taxes
Social Security tax and Medicare taxes, also known as FICA taxes, make up a significant portion of payroll taxes.
These taxes fund programs that provide retirement, disability, and healthcare, like Social Security benefits.
The current tax rate for Social Security is 6.2% on the first $142,800 of earnings, and 1.45% for Medicare on all earnings.
Federal income tax withholding is another key component of payroll taxes. This tax helps fund various government programs and services.
The amount of federal income taxes withheld from an employee’s paycheck depends on their income level and the tax bracket they fall into.
In addition to federal income tax, employees may also have to pay state income tax. The rates vary by state and can significantly impact overall payroll tax obligations.
Some localities impose additional taxes, such as city or county taxes, which further increase payroll tax burdens.
5. Unemployment Taxes or SUTA Tax and FUTA Tax
SUTA taxes, or State Unemployment Tax Act, are unemployment benefits that are paid out by the state, but they are funded by specific payroll taxes collected specifically for this purpose.
SUTA taxes were developed alongside FUTA taxes, or the Federal Unemployment Tax Act, to help reinvigorate the economy in 1939 after the Great Depression.
The Implications of High Payroll Taxes
Understanding why payroll taxes are high can help companies better comprehend the meaning behind inherent tax obligations that come along with other business income taxes, Medicare taxes, federal taxes, and social security.
High payroll taxes directly translate to a reduction in an employee’s take-home pay. This can impact an individual’s ability to manage their finances and meet their financial goals.
Due to high payroll taxes, you may need to engage in strategic tax planning to minimize tax obligations. This may involve utilizing tax deductions, credits, and/or exploring retirement savings options.
It’s essential to recognize that employers also make contributions toward payroll taxes on behalf of their employees. These contributions can impact businesses’ profitability and overall labor costs.
4. Social Security and Medicare Benefits
Payroll taxes fund important social safety net programs, such as Social Security and Medicare.
High payroll taxes ensure the continued viability and sustainability of these programs for future generations.
How Can Employers Reduce Payroll Taxes?
While payroll tax rates can be significant, there are several strategies to utilize that can help manage and optimize tax obligations, increasing employee wages and decreasing what an employer pays.
1. Utilize Tax Credits and Incentives
Employers should be aware of available tax credits and incentives, such as the Work Opportunity Tax Credit or the Research and Development Tax Credit.
These can significantly lower overall payroll taxes.
a. The Work Opportunity Tax Credit (WOTC)
By hiring individuals from targeted groups who face barriers to employment, such as veterans or individuals with disabilities, employers may be eligible for a tax credit, thus reducing their payroll taxes.
b. The (R&D) Research and Development Tax Credit
Employers involved in eligible research and development activities can claim a credit against their payroll taxes, incentivizing innovation and reducing taxes simultaneously.
Applicable to a broad range of activities, this credit is not difficult to claim, and most large businesses do so.
Your company only needs to be working on improving a process or product in the United States. Take the time to locate the parts of your business that could be applicable.
According to the IRS and Form 6765, there has been an “increase in the payroll tax credit. For tax years beginning after 2022, the maximum amount of payroll tax research credit a small business can apply against payroll tax liability increased from $250,000 to $500,000.”
With .13 cents on the dollar returned, this credit can really add up.
All you need to provide are the following:
- A project list
- The associated payroll records
- A complete ledger of detailed expenses
- Notes relating to the project
- Typical documents produced through the course of business
2. Consulting with Tax Professionals
Seeking advice from tax professionals can provide valuable insights into optimizing payroll taxes.
They can provide advice tailored to a company’s unique circumstances and help identify potential tax-saving opportunities.
To maximize savings, employers should partner with expert tax consultants who specialize in identifying applicable credits and incentives.
Employers can play a crucial role in helping their employees understand the impact of payroll taxes and providing resources to help them manage their finances efficiently.
4. Consider Outsourcing Payroll Services
Many business owners might find it beneficial to outsource their payroll services to specialized providers.
By doing so, employers can streamline operations and potentially reduce their payroll tax liability.
Outsourcing offers access to experts who can effectively calculate payroll taxes, manage payroll compliance, identify potential tax-saving opportunities, and avoid payroll tax penalties.
5. Implement a Flexible Benefits Program
By offering a flexible benefits program, employers allow employees to select the benefits that suit their needs.
This approach reduces taxable income, consequently lowering the employer’s payroll tax burden.
These programs can include options like disability insurance, healthcare spending accounts, dependent care assistance, and retirement savings plans.
6. Implement a Section 125 Plan (Cafeteria Plan)
Establishing a Section 125 Plan allows employees to contribute to qualified benefits using pre-tax dollars, lowering the payroll tax base for both the employer and employee.
Qualified benefits may include health insurance premiums, flexible spending accounts, and dependent care assistance.
7. Engage Independent Contractors
By utilizing an independent contractor instead of full-time employees, businesses can potentially reduce their overall payroll tax burden.
A self-employed, independent contractor pays their own income taxes and self-employment tax, a combination of Social Security taxes and Medicare tax.
Because they pay their self-employment tax, employers typically do not withhold taxes from their annual salary.
Independent contractors typically must pay both the employee and employer share of Medicare tax and Social Security tax.
Regularly reviewing tax withholdings and ensuring they align with an individual’s financial and employment situation can help prevent overpaying or underpaying taxes throughout the year.
9. Establish or Contribute to Retirement Accounts
Contributing to retirement accounts, such as a 401(k) or an IRA, not only helps individuals save for their future but also reduces their taxable income, thereby potentially lowering payroll taxes as contributions are typically excluded from taxable wages.
10. Leverage State-Specific Incentives
Some states offer tax exemptions for certain industries or activities.
Employers should research and understand these exemptions to capitalize on potential payroll tax savings.
State-specific exemptions can include hiring incentives, sales tax exemptions, or property tax abatements.
Some states offer tax incentives to employers who hire and invest within their jurisdiction. By exploring and utilizing these incentives, employers can reduce payroll taxes significantly.
11. Offer Commuter Benefits from Edenred
Edenred’s Commuter Benefits and Claims Reimbursement programs are an excellent way to simultaneously reduce payroll tax liability and provide valuable, tax-free benefits to employees.
By offering pre-tax Commuter Benefits, employers help employees save money on their commuting costs while potentially reducing payroll taxes for employers.
The Commuter Benefits solution uses pre-tax dollars for commuting expenses (up to $315 monthly for public transit and $315 monthly for parking).
Covering that final mile with post-tax funds, and with more sustainable, green options than ever before, Commuter Benefits can seamlessly interface with all other aspects of the Edenred Benefit Plans.
Discover more ways to save time and money and learn about getting the most out of pre-tax and post-tax benefits here.
Edenred’s Claims Reimbursement program allows employees to immediately submit eligible healthcare expenses for reimbursement, reducing taxable income, and further lowering payroll taxes.
- It also shaves hours of work for HR who typically manage this process manually, reducing labor costs.
- It increases the compliance of the process, as it’s based on a 100% receipt audit.
- Businesses can set automated parameter controls.
- It’s convenient for employees. They upload receipts and track the progress through the Edenred mobile app.
Consider Teaming Up with Edenred
Employers have numerous options to reduce payroll tax liability while providing valuable benefits to employees.
By implementing flexible benefits programs, utilizing tax credits and incentives, and exploring state-specific exemptions, employers can significantly lower their payroll tax burden.
Additionally, Edenred’s Claims Reimbursementand Commuter Benefitsprograms offer further avenues for tax reduction and employee satisfaction, enabling employers to provide valuable perks to their employees while maximizing their tax savings.
