Social Security/Medicare, Wage and Tax Reporting

White House Discusses Payroll Tax Cuts

According to new sources, senior White House officials were in preliminary discussions on August 19, 2019 about a possibility of a reduction in payroll taxes, as well as other tax breaks, to bolster a slowing economy.   In a press conference on August 20, 2019, President Trump denied concerns over the economy but did confirm that his Administration is looking at payroll and capital gains taxes.

While President Trump did not elaborate on how he defines payroll taxes, the term is typically used to describe the Social Security/Medicare (FICA) taxes that are paid by both employees and employers.  Social Security tax is 6.2% of annual wages up to $132,900 for 2019 and Medicare tax is 1.45% of all covered wages. 

Because FICA taxes are credited to trust funds that pay for federal retirement and disability benefits, proposals to reduce employer/employee contributions are typically dead on arrival.   However, President Obama was successful at enacting economic stimulus legislation that directly or indirectly put a portion of the FICA tax expense back into workers’ pockets with subsidies from the general budget.

Payroll tax cuts under President Obama

To create economic stimulus in response to the recession that triggered in 2008, President Obama stewarded two provisions through Congress that put a portion of worker’s FICA taxes back into the economy. It is emphasized that both provisions were funded by general revenues thereby adding to the national debt.  

  • The Making Work Pay tax credit. For 2009 and 2010, a refundable tax credit was available of $400 to working individuals and $800 to working families.  The credit was calculated at a rate of 6.2% on earned income for 2009 and 2010 and phased out for taxpayers with adjusted gross income over $75,000 ($150,000 for married couples filing jointly).  Employers delivered the credit to their employees by reducing their federal income tax withholding by the amount of the credit as computed for the periodic wage payment.  Any portion of the credit that was not delivered by the employer through payroll checks as of December 31 could be claimed by eligible taxpayers on the Form 1040.  The cost of the credit was funded by general revenues and not the Social Security trust fund.

  • Social Security tax cut.  In 2011 and 2012, the Social Security tax rate that applied to employees and self-employed individuals was reduced by 2.0% but employers were subject to the full 6.2%.  Like the Making Work Pay tax credit, the 2% reduction in workers’ Social Security taxes was funded by general revenues and not the Social Security trust fund. 

Observations

Thus far, the President has not presented a formal proposal to Congress for vote that would offer workers a reduction in their FICA taxes.  It is worthy to note, however, that should the nation face a recession similar in severity to that in 2008-2009, we may see a return to those Obama-era payroll tax cut provisions.

Quotes, Wage and Tax Reporting

Quotes to Note | Harry Truman on National Healthcare

Harry Truman

“The health of American children, like their education, should be recognized as a definite public responsibility.”

– Harry Truman, National Health Assembly Dinner, May 1, 1948

For the full text of the speech go to http://www.trumanlibrary.org/publicpapers/viewpapers.php?pid=1612

Quotes, Social Security/Medicare, Wage and Tax Reporting

Quotes to Note | Roosevelt on Social Security

RADIO ADDRESS ON THE THIRD ANNIVERSARY OF THE SOCIAL SECURITY ACT, August 15, 1938

The [Social Security] Act does not offer anyone, either individually or collectively, an easy life–nor was it ever intended so to do.

-Franklin D. Roosevelt, Radio address on the 3rd anniversary of the Social Security Act, August 15, 1938

Paying Wages, Wage and Tax Reporting

Payroll outsourcing is still an inside job

The movement to electronic filing and the increased complexity in the rules governing payroll have resulted in an understandable trend of outsourcing payroll and employment tax.  But, when it comes to outsourcing, out of sight does not mean out of mind.

Handing your payroll and employment tax processing to a third party is no different from hiring employees to do the work. The company’s executives continue to be liable for compliance, meaning, oversight of the work is still an inside job.

When it comes to payroll outsouring, out of sight should not be "out of mind"
When it comes to payroll outsouring, out of sight should not be “out of mind”

Occasionally, a big story hits the news about a less than upstanding payroll company absconding with their clients’ tax deposits. When this sort of new breaks, the importance of third-party oversight gets some focus. Recently, for instance, the IRS added a web page (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Third-Party-Arrangement-Chart) explaining the steps employers should take to confirm and review third-party returns and tax payments.

Invest in your internal resources

The job of supervising payroll/employment tax vendors requires substantial internal expertise.

Take earnings and deduction codes for instance.  The task of reviewing the plan or policy and choosing a preconfigured template requires an understanding of the federal, state and local employment tax rules.  Vendors are not responsible for choosing the wrong configuration templates, or correctly identifying exceptions that may apply. 

Payroll vendors are frequently tasked with creating a general ledger interface; however, there are numerous transactions outside of regular pay data that must also be correctly recorded.  Analysis of general ledger codes and their balances are required too if there are changes in the company’s organization structure that reach to where and how  payroll transactions are booked. Accuracy of general ledger entries is not only important for financial statements–they may also come under close scrutiny for purposes of tax enforcement, workers’ compensation, and other employment related audits.

Having individuals within the organization who have cross-functional knowledge of accounting, payroll and employment tax is key to the effective and efficient management of human resources.   The rules governing payroll and employment are routinely evolving, as are the technologies necessary to comply with them.  That’s why investing in payroll training and informational resources is also important.

Falling into complacency is tempting when trusted payroll vendors are relied on for the heavy lifting.  That’s why the supervisory role should be carefully defined with  performance monitored and rewarded.

Do you outsource payroll/employment tax? 

Tell us what steps you take to supervise your vendors, and how your performance is measured.