December 10, 2009

Payroll Taxes  are evil.  I think they are created to confuse people and  make a wrong impression.  In this sense they are similar to  Sales Tax or various  Air Fair  taxes and surcharges which are made to trick you in seeing the price you see is exactly price you pay.    You can’t buy  $999 TV for $1000 because of taxes and same you can’t pay individual $100000 a year if you have $100000 budget, even if you do not pay any benefits.

Another big problem about Payroll Taxes they are so different across  different countries which make payroll comparison between different countries tricky.  For Contractor it is easy to offer a freedom to live in any  place one choses (one of benefits of truly Virtual companies), however once you speak about Employee you get into the trouble because of payroll task – to provide $100K a year Salary will cost significantly different amounts in different countries and even different states, in some countries Payroll Tax can be higher than Income Tax the individual pays.

But even for traditional deeply businesses employing people in one location Payroll Taxes can cause surprising problems.   As they are increased (as happens recently with growing unemployment) the Employer gets squeezed – either it has to reduce the salaries, which may be written down in the contract  or forced to increase payroll budget.

I believe most people working for the companies do not really think about true cost of their employment – cost of taxes and benefits, at least I did not quite understand amount of taxes coming into the play until I started paying myself a salary in United Kingdom.    Unlike Federal, State or Social Security taxes these are not printed on your paycheck so you would not know unless you really want to know.

I believe it would be much better if all taxes are paid from the Salary and so it is fully seen by employee how much Money all different levels of government decide to keep for themselves.    This also would help to understand employee how much the company is really spending on him – which is very important for consulting company like ours where you can easily see how much revenue individual brings  to the company vs how much he is being paid back.

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