Document Type


Publication Date


Publication Title

Journal of Small Business Strategy








The payroll tax earmarked for the financing of social security benefits has been the leading growth tax on small businesses over the past few decades. Small businesses pay more in payroll tax than in any other form of tax. Indeed, these taxes are levied on small businesses irrespective of their profits. The statutory incidence of one-half of the payroll tax being paid by the employer and one-half by the employee may be very different from the actual incidence of the tax due to employer shifting mechanisms.

While there has been considerable conjecture about the shifting of the payroll tax burden, there has been very little research that has explicitly studied the shifting mechanisms undertaken by small businesses. In this study, responses were elicited from a sample of 182 small business owners in the Hampton Roads area of Virginia to ascertain whether the payroll tax is shifted by passing ii on to the consumer by way of increased prices, passing it on to the employee by way of reduced wages, or absorbed by the business reducing profits. This inquiry found that, in general, small businesses are not likely to shift the employer 's share of the tax burden to employees. Specifically, the most popular alternative in dealing with payroll tax increases was lo increase prices for their product/service.

Original Publication Citation

Henry, L. J., Englebrecht, T., & Iyer, G. (2001). Payroll tax incidence: An empirical investigation of shifting the payroll tax burden. Journal of Small Business Strategy, 12(2), 82-95.