On September 12, the California law makers in Sacramento approved an increase to minimum wages from $8.00 per hour to $9.00 per hour in July 2014; and up to $10.00 per hour in January 2016. Governor Jerry Brown is expected to approve the bill. This is a win for employees, and a hardship on businesses; especially small Sacramento businesses.
While an increase in wages for employees may eventually increase tax revenues through personal income taxes paid by employees, the increase is likely negligible based on the overall earnings, deductions, and credits that may be claimed. The real revenue windfall for government is the increase in taxes paid by employers. Unless you own a business that has employees, you likely haven’t heard of payroll taxes. If you own a business and have employees, you likely have lost sleep at some point over payroll taxes.
What are payroll taxes?
Businesses that employ wage earners, also known as W2 employees, generally pay separate taxes based on each dollar of wages paid to an employee. These taxes are separate from the taxes withheld by your employer on your paycheck; even though employers often get into tax trouble by failing to properly withhold and pay the taxes from your paychecks. Simplistically, payroll taxes are taxes paid for the privilege of employing a worker and have a direct correlation to the amount of wages paid to each employee.
California employers pay payroll taxes to the Internal Revenue Service and California’s Employment and Development Department. Payroll taxes are really a broad term often used for several types of taxes including social security tax, Medicare tax, unemployment insurance tax, and employment training tax. These are the taxes that are going to hurt small businesses in Sacramento when California wages are increased across the board, especially if the payroll tax rates and ceilings are increased.
Employees, however, are rightfully always in favor of higher wages. Negotiations over the California minimum wage increase included the time frames for its implementation. By gradually increasing the minimum wage over time in stages, the theory is that even small business owners will be able to adequately prepare (their books) and absorb the additional taxes and wages to be paid.
The staged implementation may be too much for some smaller employers if their actual tax rates also increase together with the increase to their baseline labor costs. This could happen to the chagrin of California employers as Governor Brown has been circulating a draft bill for consideration that would increase the California unemployment insurance taxes paid by employers for the purpose of repaying a $10 billion loan from the U.S. Treasury by 2016, and creating a surplus of funds thereafter.
Once the minimum wage increase bill is approved and fully implemented, California will have the highest minimum wage level in the country.
This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.