Payroll Tax & Social Security: troubling numbers...

Payroll tax: in numbers

Social Security is paid for in the payroll tax.  The payroll tax is paid as follows:

• 6.2% of wages Social Security (employer’s share)
• 4.2% of wages Social Security (employee’s share, 2010: 6.2%)
• 1.45% of wages Medicare (employer’s share)
• 1.45% of wages Medicare (employee’s share) 

Total Tax on wages:  13.3% in (2011), 15.3% in 2010. 

Social Security: in numbers

Social Security’s first recipient: paid in $44 in social security taxes received back $20,993.00. 

Number of workers supporting each retiree in 1950: 16

Number of workers supporting each retiree today: 3 (just over), only 1.75 full time private sector workers.

Number of workers supporting each retiree by 2030: 2

Number of times social security taxes have been raised: 40

Initial Social Security tax: 2% for a maximum tax of $60.00 per year. 

2010’s Social Security tax: 12.4% for a maximum tax of $13,234. 

Unfunded future liabilities: $20 Trillion

Much of this data comes from an article by Michael Tanner. 

No matter how you slice it, American wage earners have been paying an increasing premium to continue the Social Security program and will necessarily pay a further increased premium to support the program in the future.  Fundamental changes in the system are necessary right now to meet future unfunded liabilities and obligations. 

If your kids are using the bathroom, you can’t deduct it as your home office.

In a recent case, the Tax Court ruled that a taxpayer that deducted his “home office” expenses could not also deduct expenses for the “bathroom” outside of his home office because his children and other personal guests occasionally used it. 

Moral of the story: combined “personal and business use” of a bathroom precludes deductibility. 

HT: Tax Prof Blog

What happens if your company refuses to pay over withheld payroll taxes?

The Department of Justice recently filed a lawsuit against a construction company and its principal for continued failure to pay over to the IRS withheld employee payroll taxes.  The US is seeking a civil injunction to require that Defendants comply with the laws, prohibit Defendants from making payments to other creditors with withheld employee’s funds, and require that Defendants file monthly reports with the IRS. 

This injunction comes after years of failing to pay over withheld payroll taxes and failure to voluntarily comply with IRS administrative collection.  The moral of this story is twofold.  First, if a Taxpayer fails to voluntarily comply, the IRS will pursue its remedies to obtain a judicially enforced compliance.   Second, withheld payroll taxes (and other taxes) must be timely paid over to the IRS to avoid the steep escalation of accrued penalties and interest. 

Payroll outsourcing? You are still responsible!

Do you outsource your business’s payroll?

Many business owners choose to outsource payroll related tax duties to third party payroll service providers.  The IRS provides the following advice on Outsourcing Payroll Duties:

• If the employer uses a third party payroll service provider, the employer remains ultimately responsible for his business’s deposit and federal tax payment responsibilities.  Therefore, the employer is liable for all taxes, penalties and interest due and may be held personally liable for his company’s unpaid taxes even if the third-party is at fault for not making timely payments. 
• The IRS recommends that the employer’s address be used (as opposed to the payroll service provider’s address) as the business’s address of record to insure that the employer is timely made aware of any issues with the account. 
• The IRS recommends that employers verify that the payroll service provider is using the Electronic Federal Tax Payment System (EFTPS) so that the employer can immediately confirm online that his business’s payments are timely made.   

Therefore, every employer must remember that they are the party ultimately responsible for their business’s tax payment (and withholding) obligations. 

2009 Federal Tax Stats: pretty much all bad (if you are the U.S. economy)...

According to David Cay Johnston at Reuters analyzing recent IRS data, total U.S. income in 2009 was down 15.2% in real terms from 2007. 

From the article:

The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009.

Johnston goes on to make the following observations based on the IRS data:

• 41.7% of 2009 tax returns paid no income tax.   
• the average tax rate was 11.4% (up from 10.5% in 2007),
• over 1,400 taxpayers earning over $1 million paid no income tax in 2009,
• taxpayers reporting income of $10 million or more was down 55% from 2007,
• 2 million fewer tax returns were filed (meaning that millions of Americans went from “working to having no earned income or so little they did not have to file”). 

[NB: Bold is mine]