Hidden Half of Employee Taxes

Many citizens (including me) are concerned about increasing taxation. The reason for this is simple: Given the amount of currency that the Treasury is printing (and the bonds that are backing it), we will be looking at higher rates of inflation or even defaulting on some of the existing debt obligations.

That’s another post, but right now I’d like to look at the taxes that most of us are already paying–without even thinking about it it.

This excerpt from Cato lays it out very well. My hat is off to them for such clear and concise language:

To better understand how the burden of taxation is hidden from us, try the following thought experiment. Imagine that you are an average manufacturing wage worker. You receive a paycheck twice a month. Your gross earnings cost your employer $1,133.33 per pay period, but after unemployment insurance, workers’ compensation, and the employer’s share of the payroll tax are included, your employer must spend $1,289.76. After income and payroll taxes, your take-home pay is $934.73. Now, assume that our current system of withholding and employer-paid taxes does not exist. In your bimonthly paycheck, your employer gives you the entire $1,289.76 that he must pay to keep you on the payroll, rather than your previous take-home pay of $934.73. That is 38 percent more than you were receiving. However, individual employees now must pay each and every one of the various government-imposed costs themselves. Imagine that every time you receive a paycheck you have to go to a series of windows and pay the cashiers behind each.

  • At the first window you pay $86.70 for the “employer share” of the Social Security/Medicare payroll tax.
  • At the second window you pay $58.12 for the workers’ compensation contribution.
  • At the third window you pay $9.28 for the state unemployment insurance tax.
  • At the fourth window you pay $2.33 for the federal unemployment insurance tax.
  • At the fifth window you pay another $86.70 for the employee’s share of the Social Security/Medicare payroll tax.
  • At the sixth window you pay $85.31 for the federal income tax.
  • Finally, at the seventh window you pay $26.59 for the state income tax.

You have now paid the government its $355.03 share, only $198.60 of which (the amount from windows 5, 6, and 7) would have appeared on a standard pay stub. As a result, your new paycheck of $1,289.76 has shrunk by roughly 28 percent to $934.73. Of course, you will then have to pay additional taxes–property taxes, sales taxes, gasoline taxes, cigarette taxes, alcohol taxes, and the like–out of your remaining take-home pay.

Now, the above numbers are from 1998, so they are dated. The math, however, has not changed so much. Bottom line is that when most employees consider their taxes, they really are not considering all of the taxes which were applied to the money which they could have taken home.

The good news? Well, here is South Dakota, we don’t have the seventh window.

Go read the whole article and consider just how many other taxes (such as corporate income taxes) have a depressing influence on your take-home pay.

*Thanks to Odie for the title and article idea.*

2 thoughts on “Hidden Half of Employee Taxes

  1. I think it would be eye-opening to many people to see these figures come in their pay stub, specifically to see where total cost of compensation starts, versus where it ends up, because of taxes and insurance. Many people have never seen the real behind-the-scene amounts, and if they’re not business-minded, they simply have not considered this.

    I think seeing those numbers from top to bottom would really awaken some people to just how big a bite is being taken. Many, I’m sure, would begin to really consider that top number, and how to get more of it home.

    I’ve found that in switching to Health Savings Account system for health insurance, for instance, I take a lot closer look at the ‘real numbers’ when those bills come in. Awareness and information can only help everyone stay up to speed, and can only help what people vote for I believe.

    1. Odie,

      In truth, let’s hope some folks read this and pass it on. I would second your statement that the HSA approach makes people look at things more closely–after all, it’s their money which is being spent. I know having an HSA has helped me to be better informed about the difference between necessary and unnecessary medical procedures.

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