Payroll taxes are just as complicated as other taxes. Still, these deductions usually include income tax and social security taxes, which form the backbone of many of the benefits employees receive for healthcare, unemployment, and many more.
Taxing wages is the norm among OECD countries, with some countries far exceeding the average while others fell below. The OECD’s annual report on Taxing Wages 2021 indicates that 2020 saw the most significant decrease in average tax wedge since the global financial crisis in 2008-2009, reaching 34.6%.
The tax wedge definition refers to the measure of tax on employee income, including taxes paid by employers. Here is a quick review of which countries have the highest payroll taxes and how the U.S. compares.
Countries With The Highest Payroll Taxes
The OECD consists of 37 countries, representing a good sample of the free world. Interestingly, the 14 countries with the highest tax wedge for average workers of 40% and above are all European. All these countries, except for Portugal, dropped slightly from 2019.
Belgium’s highest total tax wedge is at 51.5%, followed closely by Germany at 49%, Austria at 47.3%, and France at 46.6%. The rest of the countries include Italy, the Czech Republic, Hungary, Slovenia, Sweden, Latvia, Portugal, Slovak Republic, Finland, and Greece.
Besides Portugal, only six other countries saw an increase in the tax wedge for an average single worker, Australia, New Zealand, Sweden, Turkey, Norway, and South Korea. On the other hand, the most significant decreases were in Italy and the U.S. The countries with the lowest tax wedges were Colombia and Chile, respectively, 0% and 7%.
These figures change when comparing family earner couples, with Turkey having the highest tax wedge at 38.2% after France at 37.%, and Belgium taking seventh place at 34.9%.
The tax wedges were mainly derived from lower income taxes, but some countries lowered their social security contributions. The countries with the highest income taxes are Denmark, Australia, and Iceland. The countries with the lowest include Colombia, Chile, Greece, Israel, Japan, Mexico, South Korea, and Poland.
Employee social contributions range from 0% in Australia, Colombia, New Zealand, and Denmark to a high of 19.2% in Lithuania. The highest increase in employer contributions was in France at 26.6%. In more than half the OECD countries, employee and employer social security contributions exceeded 20%. These contributions represent one-third of labor costs in Austria, France, Germany, and the Czech and Slovak Republics.
How Does The U.S. Compare
The average single worker in the U.S. saw a decrease of 1.4% to 28.3% compared to 29.7% the previous year, placing it at the 30th lowest level of the 37 member counties, one position lower than in 2019.
Compared to the OECD average of 76% of income tax and employer social security contributions, the U.S. is lower at 75%. In addition, one-earner couples with two children had a tax wedge of 14% in 2020 compared to the OECD average of 24.4%. Child-related benefits and lower taxes reduced these.
Data from the OECD report shows that between 2000 and 2020, the decrease in the tax wedge for the average single worker was 2.5 percentage points from 30.8%. However, the average reduction in the Organization of Economic Corporation and Development was lower at 1.8% over the same period.
Payroll Software and Payroll Deductions Accuracy
For most companies, payroll is challenging because of the difficulty of making the required deductions accurately. However, according to TRUiC, payroll software includes several functions that ensure the correct tax and social security deductions while retaining all benefits paid to employees. Besides processing deductions and making payments into employee accounts, the most reliable payroll software should also allow employees access to enter times and check their earnings.
In addition, the best payroll services make processing much more manageable, saving time and costs, especially from any penalties incurred from human error. Read more about payroll software capabilities on this suggested website.
Conclusion
The OECD results reflect payroll tax and don’t consider other taxes paid by individuals and companies. At 28.3%, the U.S. sits at the lower end of the table compared to the other countries in the organization. Currently, employees’ Social Security tax rate is 6.2%, with the same amount matched by the employer; the Medicare rate is 1.45%. These figures compare favorably to the OECD average.
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