Why are payroll taxes so complicated?

Payroll taxes are complex and challenging—but if you have any experience with them, you already know that. For the uninitiated, though, we wanted to publish a brief primer highlighting some of the biggest reasons for that complexity—seven to be exact. By understanding the different payroll tax challenges facing employees in your organization, you can make smarter choices about how to support them.

1. Multiple tax types

When we talk about payroll taxes, we’re actually talking about various types of taxes—federal income tax, Social Security, and Medicare, on top of state and local taxes. Because each tax type has different rules, rates, and deadlines, it can be challenging for teams working on their own to keep up with the different requirements for each.

2. Changes in tax laws

Tax laws evolve over time, and with these changes, employers may have to change how they calculate and withhold taxes. Employers have to keep up with these changes or else face the potential for penalties and interest charges.

3. Employee benefits

While popular and important, employee benefits like as 401(k)s, health insurance, and flexible spending accounts all affect your payroll taxes. Employers need to understand these impacts to ensure they’re withholding the correct amounts for each.

4. Employee classification

How employees are classified can also impact payroll taxes. For example, is an employee classified as exempt or non-exempt? Or are they an independent contractor? Understanding the rules of each classification adds complexity to the payroll tax process but is important for staying compliant.

5. Reporting requirements

When it comes to actually filing your payroll taxes, there are different forms to be aware of. Each form has different deadlines and requirements, and failure to file on time or accurately can result in penalties.

6. Payroll software

Most employers use payroll tax software to calculate and withhold taxes. But even though software can make the process easier than it used to be, these programs can still be complex to use on your own.

7. Auditing data

Auditing payroll tax data involves verifying a large amount of information, potentially across multiple sources, to ensure accuracy and compliance with tax laws. Common errors include invalid social security numbers, negative wages, invalid addresses, and Medicare discrepancies, among others.

Taken together, these seven complexities make processing and paying payroll taxes a real challenge, especially for companies with limited resources. That’s why many employers end up turning to a service partner like OneSource Virtual for help. With a partner’s help, you can be confident you’re calculating, withholding, and filing your payroll taxes correctly and on time.

Discover how OSV can help you support or supplement your existing team, with proactive payroll tax services that provide extra visibility you don’t always get with other payroll tax providers. Explore our other payroll services or contact us to learn more.