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November 8, 2006

French Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

Federal Income Tax

Houston Tax Attorney

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It is always interesting to hear about how other countries address tax issues.

Like the United States, the French government collected higher than expected tax revenues last year. Where the United States government opted to keep the tax revenues, the French government has proposed to use the tax revenues to exempt minimum wage employees who work for small companies from the French payroll tax.

Perhaps it is not a fair comparison as the French deficit is reported to be only about 3% of its gross domestic product, but exempting minimum wage employees who work for small businesses from US payroll taxes is an interesting proposal.

US payroll taxes really can be onerous for small businesses, especially if the business employs a lot of low wage employees. This is especially true for businesses whose employee’s rely mainly on tips or gratuities or for temporary employment agencies.

Currently the federal payroll tax includes FICA (Social Security and Medicare taxes) and FUTA (unemployment taxes). The FICA tax is 7.65% of the employees’ wages up to $94,200 of wages, which is paid by both employers and the employee. The FUTA tax is 6.2% on the first $7,000 of employee wages, less the state unemployment tax credit of 5.4%.

Congress and the Treasury Department have often commented on the burdens that payroll taxes pose on small businesses. In fact, the IRS recently put forth Form 944 to help streamline the process for a few small businesses (those with less than $1,000 in employment tax liabilities). While this measure does help a few small businesses, it really doesn’t help that many small businesses and it does not help the lower wage employees of those businesses.

The French proposal would help many thousands of small businesses and the tax exemption might very well be much more meaningful for lower wage earners than increasing the national minimum wage.

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