And the Best Free Payroll Service Is...

Eight different taxes. That’s what I had to compute every time I wrote a paycheck back when I was running a small business on the side. Eight taxes:

At least I “only” had to send the payments to four different government agencies.

Actually, I personally could have gotten away with doing less. My micro business (selling political T shirts and bumper stickers) could probably have declared its one part time employee to be a contractor. And even as an employee, he put in few enough hours that I probably didn’t need to worry about unemployment insurance.

But I was running the business largely as a personal experiment to learn first hand the headaches experienced by small business owners, so I tried to do everything by the book. And yes, the governments provided some nice hefty books. The IRS provided a 67 page two column guide. My state’s employer guide was only 59 pages. Keep in mind that these were just for the purpose of computing and delivering withholding taxes. The (sole proprietorship) business itself had its own tax guides – for income, FICA, Medicare, and sales taxes.

I think I spent more time dealing with government paperwork/payments than my part time employee spent working for the business. I definitely would have better off doing the work myself, save that I wanted to do the experiment. Jobless people take note.

For full time business owners with full time employees, this overhead is a smaller fraction of doing business, but it is still a significant headache. A big corporation like Wal-Mart can hire specialists to handle payroll headaches. The really big ones can optimize the process and even have their own specialized software designed. For a Mom and Pop business, or a small startup, these headaches occupy the owner(s). Keep this in mind all ye anti-Wal-Mart/buy local lefties. All this government-imposed overhead gives the big corporations an advantage over locally owned businesses.

And in the case of computing payroll taxes, it is all very unnecessary!

We could eliminate at least 80% of the employer’s tax guide without changing the underlying tax code at all!

There is a corporation which has even larger economies of scale than Wal-Mart. This corporation has enormous amounts of expertise in tax and labor law. It has inside information, even. Indeed, this corporation is already involved in part with the payroll processing of every business in the country. The headaches suffered by small employers are needless redundancy. This very large corporation could do it all.

This very large corporation is the federal government of the United States of America. This large corporation could and should provide a free payroll service for all businesses. The process is simple.

Why don’t we run the government more like the other monopoly utilities we pay bills to? Take a look at your phone bill. Here’s part of one of my old phone bills (click to zoom):

My phone bill included:

Imagine having to compute that yourself every month. Worse yet, imagine having to time your own long distance calls for a plan that isn’t unlimited. This is what the government puts employers through regularly.

Here’s a wacky idea: why not have employers report wages paid and to whom (name, address, Social Security Number) each month, and then have the government send a monthly bill to the wage recipients for taxes due? If phone companies, electric companies and local water utilities can send out monthly bills, why can’t the federal government. Come to think of it, the federal government just happens to own a subsidiary called the “Post Office:”

Post Office

The federal government also owns a printing service. And since the wage earners have to report dependents when they file, the government needs to gather the information that goes on W-4 forms anyway. Having employers gather this information is redundant and a violation of privacy.

Such a system would present a bit of sticker shock each month as people see their federal government bill along with their power and telephone bills. Such would make conservatives and libertarians rather happy. If this is unacceptable, we could still simplify the employer’s roll while continuing employer withholding. Simply figure out what the average total withholding rate is and round to a convenient number, such as 20% or 25%. Require employers to withhold the same percentage for all employees. Then the government can send monthly checks to those who overpaid (the government has its own bank as well!) and bills to those who need to pay more. Duh!

I’ve left out a few details, and I’ll leave it to a future article to determine how much this universal withholding should be. But don’t let that hold you back from bugging your friendly federal politician if you like this idea. They can consult the Congressional Budget Office, which should be able to do a better job than I. Start dialing.

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