Question

The overall expense per employee per pay period, once taxes are factored in, is roughly _____ over and beyond the employee's base pay.

a) 10%
b) 15%
c) 20%
d) 25%

Answer 1

The overall expense per employee per pay period is roughly 25% above their base pay, including visible deductions and the indirect costs of employer's share of taxes, which may manifest as lower wages.

Step-by-step explanation:

The overall expense per employee per pay period, once taxes are factored in, is roughly 25% over and beyond the employee's base pay. When an employee looks at their paycheck, they see specific deductions like 6.2% for Social Security and 1.45% for Medicare. However, not just the visible taxes but the employer's portion of the payroll taxes, which, though not deducted on the paycheck, still affect the employee's compensation indirectly. Economists suggest that employers tend to pass along their portion of these taxes to employees in the form of lower wages. Consequently, that contributes to the actual cost per employee per pay period.

For a gig-economy worker who receives a 1099 tax statement, the whole scenario changes as they are considered independent contractors. Such workers are responsible for both the employee's and employer's side of the payroll tax, increasing their tax burden.