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Commentary

The 1995 Hopkins and Diversified Research study confirms that tax compliance and payroll recordkeeping are the two largest components of regulatory burden today. Small businesses bear a greater relative burden of tax compliance costs based on their revenue or senior management time. In fact, tax compliance or payroll recordkeeping elicited widespread concerns about burden, although some surveyed firms did mention other regulatory costs that were burdensome. Firms with fewer than 10 employees (excluding firms reporting only minor burdens) reported that their tax and payroll costs represented about 80 percent of their total regulatory burden.

When firms were asked how burdens might be reduced, 95 percent recommended simplifying reporting and recordkeeping, 73 percent suggested additional small business exemptions, and 68 percent asked for more flexible enforcement.

In the only study available in the United States on the impact of tax-related paperwork on all firms by firm size, the Tax Foundation reports that the smallest firms spend 0.5 percent of their sales on tax compliance activity; the largest firms spend less than 0.1 percent of their sales on tax paperwork (Table 1). The more recent 1995 Hopkins and Diversified study shows that the smallest firms (those with fewer than 50 employees) spend closer to 5 percent of revenue on tax compliance costs.

TABLE 1: Estimated Cost of Corporate Income Tax Compliance by Amount of
Company's Annual Sales

_________________________________________________________________

Annual Sales

(Thousands of $)  

Compliance Cost-to-Sales
Ratio
(%)  
Estimated
Compliance Cost
($) 
1,000
25,000
50,000
100,000
250,000
500,000
750,000
1,250,000
2,000,000
3,000,000
5,000,000
7,500,000
10,000,000
0.50
0.50
0.50
0.47
0.13
0.13
0.12
0.07
0.08
0.07
0.07
0.05
0.05
5,025
126,000
251,000
470,000
325,000
650,000
900,000
875,000
1,600,000
2,100,000
3,500,000
3,750,000
5,000,000
Source: Arthur P. Hall, The High Cost of Tax Compliance for U.S. Business,
Special Report No. 25, Tax Foundation, November 1993.
_________________________________________________________________

Recent administration actions have been undertaken that could significantly reduce the taxpayer compliance burdens, including a proposed increase from $10,000 to $25,000 in 1993 (subsequently reduced by Congress to $17,500) in the amount of capital investment that businesses can expense; simplified calculations for computing the individual alternative minimum tax, simplified and unified determination of depreciation deductions (allowing taxpayers to group certain assets in one or more "general asset" accounts), an increased threshold for recordkeeping on meals and entertainment expenses from $25 to $75, and rules that would allow an unincorporated entity to elect to be treated as a partnership by simply checking a box on its tax return (replacing complicated business form criteria).

The administration has moved forward on the Simplified Tax and Wage Reporting System (STAWRS) that will ultimately enable an employer to file a single return providing payroll and tax information electronically (or, for a small business, on one sheet of paper that can be copied). This system would eliminate the need to file multiple reports with state and federal agencies that require the same data. Finally, the administration has proposed reforms to ease rules for participation in pension plans, and reduce the frequency and quantity of information reports. These measures should prove very beneficial to small businesses.

The Wage Bracket Percentage Method Tables show the gross wage brackets that apply to each withholding percentage rate for employees with up to nine withholding allowances. These tables also show the computation factors for each number of withholding allowances and the applicable wage bracket. The computation factors are used to figure the amount of withholding tax by a percentage method.

Two kinds of Wage Bracket Percentage Method Tables are shown. Each has tables for married and single persons for weekly, biweekly, semimonthly, and monthly payroll periods.

The difference between the two kinds of tables is the reduction factor subtracted from wages before multiplying by the applicable percentage withholding rate. In the tables for Computing Income Tax Withholding From Gross Wages on pages 29-32, the reduction factor includes both the amount for withholding allowances claimed and a rate adjustment factor as shown in the Alternative 2--Tables for Percentage Method Withholding Computations on page 27. In the tables for Computing Income Tax Withholding From Wages Exceeding Allowance Amount on pages 33-36, the reduction factor does not include an amount for the number of allowances claimed.

Use the kind of wage bracket table that best suits your payroll system. For example, some pay systems automatically subtract from wages the allowance amount for each employee before finding the amount of tax to withhold. The tables for Computing Income Tax Withholding From Wages Exceeding Allowance Amount can be used in these systems. The reduction factors in these tables do not include the allowance amount that was automatically subtracted before applying the table factors in the calculation. For other systems that do not separately subtract the allowance amount, use the tables for Computing Income Tax Withholding From Gross Wages.

When employers use the Wage Bracket Percentage Method Tables, the tax for the period may be rounded to the nearest dollar. If rounding is used, it must be used consistently. Withheld tax amounts should be rounded to the nearest whole dollar by (1) dropping amounts under 50 cents and (2) increasing amounts from 50 to 99 cents to the next higher dollar. Such rounding will be deemed to meet the tolerances under section 3402(h)(4).

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