MOUNT VERNON — Payroll professionals pay about 146 million wage earners and, through the payroll witholding system, collect and deposit about $1.6 trillion in witholdings each year, according to the American Payroll Association.
Employers in the United States are required to withold federal and, in most cases, state income taxes, as well as Medicare and Social Security taxes from their workers’ paychecks. Employers may also have to withold a city income tax, and, depending on the employee, other involuntary witholdings such as child support and wage garnishments. Companies are also required to pay a matching amount of Social Security and Medicare taxes, and state and federal unemployment taxes for their employees.
The cost of calculating and depositing these witholdings can be substantial for employers, but are generally considered the cost of doing business. This was not always the case, according to Michael O’Toole, senior director of publications and government relations at the American Payroll Association and editor of the 2000 book, “A History of Payroll in the U.S.”
Payroll witholdings have their roots back to the time of the first world war, when some very large companies that could handle the extra record-keeping did voluntary deductions for war bonds. After the war, some employees at these companies were allowed to have witholdings placed in savings accounts.
In the 1930s, the concept of Social Security and mandatory witholdings was controversial, according to O’Toole. They were part of the Social Security Act and the Fair Labor Standard Act, which were challenged all the way up to the Supreme Court. Apart from objections to Social Security itself, he said, many businesses felt mandatory witholdings would add a huge amount of extra record-keeping and create an unfair administrative burden.
“World War II spurred the change,” O’Toole said. “The government needed money for the war, to build ships, planes and weapons. That started with war bonds. By 1943, the governenment was getting half a billion dollars in money to purchase war bonds.”
He said the amount spent on payroll and payroll witholding varies from business to business. Some prefer to hire other firms to complete the service, while others prefer to keep such sensitive information in-house.
Before 1943, wage earners were required to pay income taxes when they filed a tax return, O’Toole said. Asked why employers are now required to process witholdings, O’Toole said it is much easier and efficient for government to collect the taxes rather than to have employees paid on a quarterly basis. This practice results in over 95 percent of compliance; but, he said, when people are independently employed, such as contractors, the compliance rate is much less.