How to Reduce Payroll Taxes: Smart Strategies for Businesses

As a small business’s earnings increase, its tax responsibilities also rise. That’s why it’s crucial for small business owners to take a proactive approach to tax planning, preventing unexpected and hefty bills.

From optimising business structure to staying updated on tax laws, these are just a few of the strategies that businesses can implement to lower their tax liabilities. 

Want to know all the ins and outs of how to reduce payroll taxes? This blog has all the answers, so keep on reading!

Understanding payroll taxes

Payroll taxes refer to the taxes that employers withhold from their employees’ salaries and pay on behalf of their employees to the relevant government authorities. These taxes fund various social programs, such as Social Security, Medicare, and unemployment insurance.

However, managing administrative tasks associated with payroll taxes might pose a burden and can be time-consuming. In addition, they can hinder financial growth, especially for small businesses. Staying compliant is also challenging due to the ever-changing nature of tax regulations. 

Why are employer payroll taxes so high?

Employer payroll taxes are high because of the plethora of taxes that employers must pay or withhold from their employees’ paychecks. This often includes but isn’t limited to: 

• Social Security and Medicare tax;
• State and local income taxes;
• Federal unemployment tax. 

It’s important to note that these tax contributions may vary depending on the country and local tax regulations. Additionally, the overall tax burden is also determined by the business structure and industry. 

How to reduce payroll taxes and help businesses save?

Coupled with other operational costs, payroll taxes can put a serious strain on businesses’ finances. This section will highlight the best strategies to help you reduce payroll taxes and enhance your savings funds. 

1. Optimising business structure

The choice of business structure has a significant impact on the payroll tax liabilities. For instance, payroll taxes are minimal in a sole proprietorship as the owners typically don’t pay themselves a salary. Similarly, in partnerships, the business itself doesn’t pay income taxes. 

However, in C corporations, payroll tax liabilities arise when the corporation pays salaries and wages to its employees. So, business owners should consult with tax consultants to determine the best business structure based on short-term and long-term tax implications. 

2. Tax-advantaged benefits

Offering tax-advantaged benefits to employees is a strategic way for businesses to attract and retain talent while also providing financial advantages for both employers and employees. Some of the key tax-advantaged benefits include health insurance, retirement plans, and dependent care assistance. 

These benefits are exempt from certain payroll taxes, and their implementation can significantly reduce the overall tax burden for both employers and employees. This results in big savings that businesses can utilise to develop their core features and services. 

3. Effective use of fringe benefits

Fringe benefits are non-wage compensations provided by employers to their employees in addition to their regular salary or wages. These benefits can take various forms, and when strategically implemented, they can offer tax advantages for both employers and employees.

These fringe benefit packages often include educational assistance to cover expenses related to professional development and transportation benefits, like transit passes. In some cases, meals and lodging can also be excluded from the employees’ taxable income. 

4. Leveraging tax credits and deductions

While payroll taxes typically fund programs like Social Security and Medicare, businesses can take advantage of various tax credits and deductions to minimise their overall tax liability. One such tax credit is the Work Opportunity Tax Credit, which is given to employees who hire individuals from specific target groups facing significant barriers to employment.

In addition, some states and countries offer tax credits to businesses that invest in employee training and education. These credits encourage workforce development and can result in tax savings for the employer.

5. Outsourcing payroll management

Payroll taxes are complex and differ across countries. On top of that, these taxes are ever-changing, and it can be challenging to stay on top of the curve. That’s why outsourcing payroll management might be the best decision for businesses that want to save time and money. 

Native Teams has global payroll solutions, which are ideal for small and large businesses with an international workforce. Our payroll solutions are fully compliant and aligned with all the local employment laws. 

6. Alternative labour sources

Nowadays, finding and hiring the best global talent is easier than ever. And why not take advantage of that? Hiring overseas provides employers to tap into international markets and the flexibility to benefit from lower tax liabilities in another country.

Another viable solution is to hire independent contractors. When working with contractors, employers hold no responsibility to handle the contractors’ taxes — that obligation falls on the contractor. 

7. Staying updated on tax laws

Staying updated on tax laws is essential for businesses to avoid penalties and optimise savings. Tax regulations are subject to frequent changes, and remaining updated ensures compliance with the latest requirements. 

This approach not only mitigates the risk of penalties for non-compliance but also allows businesses to identify opportunities for tax savings, credits, and deductions.

To wrap up

Without careful and thorough tax planning, businesses will have to deal with high tax liabilities. Optimising business structure, utilising tax-advantaged benefits, and hiring alternative labour sources are some solutions that can mitigate the high tax bill. Hopefully, this blog provided you with all the essential information to cut down your payroll taxes.