Everybody loves payday. And everybody hates comparing their gross pay to the number deposited in their account. The process of calculating that number on your paystub is pretty complex, and employers carry the burden of doing it right: every paycheck, every time. And they spend a lot of time and money on services, software, and technology to make it happen. So how did employers wind up as tax collectors? This is the oversimplified version, but it’s really kinda interesting.
Blame Lincoln. Throughout most of our history, relatively few Americans paid income taxes. Those that did transacted directly with the government. But Lincoln figured out that the Civil War was going to be expensive, so in 1862, both income withholding by employers, as well as several kinds of excise taxes, were instituted to help fund the effort. But in 1872, both the practice of withholding and the income tax itself were ended.
Or Maybe the Rockefellers. By the dawn of the new century, the government was looking for a steadier stream of income than what was provided by tariffs on imports, exports, and other transactions that were the main sources of revenue. To get around a pro-states-rights court ruling, in 1909 they proposed the 16th amendment allowing them to tax citizens directly without going through the states. Most business leaders and wealthy Americans opposed this direct income tax, and a senator from Rhode Island named Aldrich (whose daughter happened to be married to John D. Rockefeller) was so sure that the change lacked support that in 1913 he called for a vote to ratify the 16th amendment. He apparently underestimated the progressives, who called his bluff and won the vote to ratify. People like the Rockefellers started massive charitable foundations to protect their wealth. And to, you know, help people.
But Employers Fought Back! Being in business and being a tax agent for the government was annoying, and employer complaining got the withholding regulations (but not the tax) abolished in 1917. At this point, the few who owed income taxes paid the following year, in quarterly installments.
Then WWII Happened. And it was expensive. The government needed our tax money NOW, and lots of it. Tax rates went up, and payments were now due as you worked – requiring a pro-rated portion of your annual tax to be paid each paycheck. It was felt that collecting from individuals would be difficult, especially with the rates so high, so in 1943, withholding was reinstated. This time it was here to stay.
Changes – Turn and Face the Strange. The path to withholding was complex, but it’s nothing compared with the variables created by the US tax code. And while the practice of employer withholding is unlikely to change, the code does all the time. Including the cut/overhaul/reform legislation passed last month. It’s no wonder that the ability to stay current with local, state, and federal tax changes was the top driver of payroll investment decisions in our new HR Impact study.
Finance and payroll professionals, payroll service companies, and technology providers have lots of work to do to help companies stay compliant, and make sure you get every penny you’ve earned. They are the unsung heroes of our business. Without them, we don’t get paid. And what do I always say? It ain’t a job if you don’t get paid.