To qualify for enhanced energy tax benefits, a taxpayer must ensure laborers and mechanics performing construction, alteration or repair of a facility are paid at least the prevailing wage rate listed in an applicable wage determination. A taxpayer and contractor may satisfy the overall wage requirements by paying such wages as cash wages or by providing a combination of cash wages and employer-provided bona fide fringe benefits.
Exemptions
Many states allow exemptions from their minimum wage laws for specific types of workers. Those exemptions can affect how much you pay your employees. Some exclusions are permanent, while others are temporary and expire periodically. Exemptions, deductions and credits all make an impact on your tax liability. Understanding how each work will help you utilize them to lower your tax burden.
State laws provide a variety of property tax exemptions based on the type of property purchased and the use to which it will be put. Food, clothing, and prescription medicine are common products for which a state may offer a property tax exemption. In addition, several states also offer state income tax exemptions for certain classes of individuals, such as veterans or clergy members.
Some localities, such as New York City, levy their income taxes separately from the state level. Individuals who work in these locations must pay local income taxes if they earn enough to trigger the tax. Other localities in Alabama, Kentucky, Maryland, Kansas, Oregon, Ohio, and Pennsylvania impose earnings or payroll taxes that are typically a percentage of total wages.
State law allows legislatures to establish various exemptions from sales and income taxes for nonprofit charitable and educational organizations. However, these organizations must be able to meet the governing body’s requirements to receive the exemption.
Implementing payroll software like ADP streamlines the complex task of managing minimum wage compliance and ensures accurate and efficient tax calculations, reducing the risk of errors and penalties for businesses. By automating these processes, payroll software contributes to regulatory compliance, saving time and resources while fostering financial transparency in payroll management.
Payroll Taxes
Payroll taxes are withheld from each employee’s paycheck, federal income and FICA taxes (Social Security and Medicare). State and local governments may also collect payroll taxes. These taxes raise billions of dollars for various state and local purposes.
While many taxpayers are aware of the importance of eliminating state income taxes, few understand that payroll taxes, which are not directly related to how much a person earns, are also regressive and take a large chunk out of everyone’s wages, regardless of whether the income is low or high. In addition, most people are unaware that payroll taxes affect their purchasing power in the same way as sales and property taxes do.
In addition to payroll taxes, most states have a variety of other types of tax laws that are complex and difficult to understand. Those who need help understanding their state and local taxes should contact their county’s tax office or seek the assistance of a tax advocate or ombudsperson.
Research shows that employees are less sensitive to payroll tax changes than employers, who can “shop around” for workers and shift production to locations with lower tax rates. For this reason, payroll taxes make up a larger share of federal, state and local tax revenue than any other type of tax.
Tax Rates
Employers must pay employees at least the state minimum wage rate, $7.25 per hour (excluding tipped workers). Minimum wage rates are determined by region and employer size. Annual increases in the minimum wage are based on the March-to-March change in the Consumer Price Index for All Urban Areas (CPI-U).
A growing number of states and localities have adopted a graduated income tax system that imposes higher taxes on families with high incomes than those with lower incomes. This tax structure is a major driver of the differences in state and local minimum wages, which tend to be higher in states with a high flat-tax rate, such as Massachusetts.
Some flat-tax advocates argue that cutting business owners’ tax bills by reducing the federal personal income tax will spur economic growth. However, ITEP research suggests that state and local taxes are only about 2.3 percent of the cost of doing business, with most of the rest tied to payroll, equipment, and property costs.
While minimum wage laws are useful for combating inequality, they should be considered one element of an overall policy package to tackle income and labor market inequality. For example, policies such as social transfers to help poor households and enabling business environments can supplement and reinforce minimum wage laws by lowering the barriers to employment and expanding opportunity for all.
Prevailing Wage
As contractors secure contracts to work on state and local government-related projects, knowing whether they are subject to prevailing wage rules is important. These laws create a special and much higher minimum wage for certain construction jobs on projects with a governmental connection. This could be as simple as the project being funded by a tax-exempt bond, financing assistance or a property grant from the government.
A prevailing wage is the hourly rate, usual benefits and overtime paid to workers performing similar work locally. The prevailing wage is determined using available data, which may include in-house reviews of payrolls or surveys of wages on active construction projects. A general wage determination covers several occupations in a geographic area, while a project wage determination is specific to a particular construction job. Both wage determinations typically become effective on July 1 and are in effect until June 30.
While prevailing wage laws serve some public interest goals, they also impose significant burdens on taxpayers forced to pay for increased costs due to the policies. A study found that prevailing wage laws limit competition and provide large benefits to labor unions, all at the expense of hardworking taxpayers.
