In 2013, workers were treated to a 2 percentage point increase in their payroll taxes. You should make sure the new rates are properly assessed on employee paychecks and understand how this affects the hiring and headcount in your organization.
Congress’s feckless attempts to avoid the 2013 payroll tax increase flopped, and the rate jumped 2 percentage points – to 6.2 percent – in early January. The tax helps pay for Social Security and Medicare. Assessed on the first $113,700 of compensation (maximum $7,049.40 per individual), the individual taxes are matched by employer contributions.
You might have a small business and are anguishing over whether you can afford to hire one more person to help meet demand. You’ll face costs of recruiting and on-boarding, plus of course the new salary. Let’s say the new person will earn $30K. The extra 2 percent in payroll taxes will cost you an additional $600 a year, a nominal amount. It makes sense to hire or not hire based on incremental cost/benefit, but the 2 percent rise in payroll taxes is small potatoes and shouldn’t sway your decision.
The tax increase will only really be noticed by those at the low end of the income scale. If your company hires low-wage workers, they may become harder to recruit due to this tax. That will be true in situations where your business, plant or shop is located in a middle- or high-income area. Low wage workers at the margin may find themselves unable to live in your area because of decreased take-home pay. And if these workers are impacted by a 2 percent increase, they probably would be hard-pressed to pay for the gas to commute long distances to a job. HR may need to develop plans to help low-wage workers either live where they are needed or help defray the cost of commuting.
Low-wage shoppers will have less money to spend. If you run a retail business patronized by mostly low-income customers, you may see a sales fall off as shoppers attempt to compensate for the 2 percent loss. In some cases, small businesses may have to reconsider headcount if business drops off. There are already reports that mall foot traffic is down in 2013. As people trade-down to less expensive brands, stores at the lowest end may steal business away from slightly more upscale stores. We can see a scenario where the HR departments from the lowest tier of retailers reach out to laid-off workers from higher tiers.
HR can perhaps initiate small but meaningful new benefits to help keep workers on the job. For instance, does your company offer a lunch allowance or perhaps a subsidized cafeteria? You can increase expenditures to help ensure that workers can afford a nutritious lunch or a heart-healthy snack.
In any event, if it important for your HR department to communicate with all employees explaining the changes to their paychecks, where the money goes, how it’s used and how much the company shares the additional tax burden.
For more information about small business taxes in 2013, be sure to read our update on Sec 179 for 2013.