The hidden costs of a minimum wage hike

January 22, 2014: 5:56 AM ET
burger king owners
Gene Hatfield (left) and Mike DeRosa own 12 Burger Kings in Wisconsin. DeRosa says he's worried his vendors will raise prices if the federal minimum wage increases.
NEW YORK (CNNMoney)

When wages go up, so do taxes that employers must pay.

As states, cities and counties -- and potentially the federal government -- increase minimum wage, it's not just the hourly wage hike that business owners must budget for. Some payroll taxes are tied to the amount an employer pays in wages. The more you pay your workers, the more you pay in taxes.

"The minimum wage increase is not just the dollar an hour, but it's also a raise in our taxes," said Jason Lerner of Little Learner Academy. His family owns five child care centers in New Jersey, where the minimum wage rose from $7.25 to $8.25 on Jan. 1.

In total, these taxes add an extra 10.5% to Little Learner Academy's payroll expenses.

Take Social Security. Employees have 6.2% of their wages withheld from each paycheck for Social Security. But what they don't see is that their employer also chips in, matching the 6.2%. For Medicare, both the employer and the employee pay 1.45% of the wage.

Related: Minimum wage hike could mean a raise for all

Employers also pay taxes for unemployment and disability insurance, as well as workers' compensation. Those can vary depending on factors like the state where the business is located.

Thirteen states raised the minimum wage at the start of 2014 (by varying degrees), and later this year, two Maryland counties, Washington D.C., and the state of California will do the same. Meanwhile, President Barack Obama is backing a Democratic proposal to raise the minimum wage from $7.25 to $10.10 over three years.

Mike DeRosa worries about the wage increase and the associated taxes. But he is also concerned about other potential expenses that could increase with a minimum wage hike.

DeRosa and his partner Gene Hatfield own 12 Burger Kings in Wisconsin, where the minimum wage is $7.25. If the federal wage jumps to $10.10, not only will DeRosa have to raise wages for 300 employees, he fears his vendors will also raise their prices on things like snow plowing, CO2 delivery, equipment repairs and baked goods.

Related: Will a higher minimum wage reduce income inequality?

"All of those types of businesses usually pay hourly wages and could slightly increase their cost to me," DeRosa said.

It's too early to tell how DeRosa's businesses might be affected by a federal wage raise.

But Lerner admits that neither the New Jersey wage hike nor the increase in payroll taxes are going to put him out of business. He had to give $1 raises to only four of his 100 employees who make minimum wage, and an additional 20 were given $0.25 an hour raises to meet the new minimum.

"It's not a huge number for us," he said. "But when people talk about employee pay going up, they don't talk about the additional taxes."

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