payroll tax holiday

The law maintains the lower payroll tax rate which reduced the social security tax taken out of your paycheck from 6.2% to 4.2% on income up to $110,100.  In addition, if you are self-employed, you will continue to pay the reduced social security tax rate of 10.4% instead of 12.4%.  The law also extends federal unemployment benefits and prevents doctors who accept medicare from taking a 27.4 percent reimbursement cut.

The payroll tax holiday extension also increases the amount new federal hires and those with less than five years as a government employee have to contribute to their pension plans in order to fund the payroll tax holiday extension and unemployment benefits.

What Does This Mean for You?

The extended payroll tax holiday prevents a tax hike that would impact 160 million working Americans and keeps an extra $1,000 per year in your pocket if you earn $50,000 per year($50,000 x 2%).

For 2012, your maximum savings will be up to $2,202($110,100 x 2%).  If you are married and each of you earn at least $110,100, that is a savings of $4,404!  That’s more money for you and your family.

How will that savings help you this year?

Something that you also want to check are taxes you’d be expected to pay, specifically taxes on your Social Security income.

Social Security

Will My Social Security Income Be Taxed?

Not everyone has to pay taxes on their Social Security benefits.  To see if your Social Security will be taxed, you have to look at your *combined income and your marital status.  According to IRS Publication 915 (Social Security and Equivalent Railroad Retirement Benefits), the income thresholds for Social Security are:

• If you’re single and your total combined income for the year is between $25,000 and $34,000, then up to 50% of your benefits can be taxed.
• If you’re single and your total combined income for the year is greater than $34,000, then up to 85% of your benefits can be taxed.
• If you’re married filing jointly and your total combined income for the year is between $32,000 and $44,000, then up to 50% of your benefits can be taxed.
• If you’re married filing jointly and your total combined income for the year is greater than $44,000, then up to 85% of your benefits can be taxed.

* Combined Income-Combined income when figuring tax on social security income is Adjusted Gross Income plus nontaxable interest plus 1/2 of social security benefits.

SSA-1099: You’ll Need It

If you’re already receiving Social Security benefits, you can use your SSA-1099 form (Social Security Benefit Statement) to determine how much of your benefits are taxable. You should receive it in January and should have the information required for the previous year.

When you file taxes, you’ll need this form, so please keep it in a safe place.  Don’t worry about figuring how much of your social security income is taxable.  TurboTax easily makes the behind the scenes calculations and figures out the accurate amount of social security income that is taxable based on your income entries.

Thoughts on Social Security Income

I’d love to hear your stories. Are you preparing to retire soon? Have you considered your Social Security income?

Payroll Tax

The payroll tax cut bill extension keeps taxpayers’ portion of social security tax at 4.2%, renews  unemployment benefits, and the medicare reimbursement rate for an additional two months.  When Senate leaders return from vacation, a joint House Senate panel is set to negotiate how to continue the tax break through the end of 2012.

Now Congress has gone on vacation and we can start to enjoy our holiday without worrying about a loss of income for the first two months of the year. The extension of the payroll tax bill will continue to help a typical family making $50,000 per year keep $40 additional per paycheck.

Now, how will the $40 per paycheck savings help you as you start the new year?

payroll tax

If you recall, the Senate passed the payroll tax bill extension for two months to give the Democrats and Republicans time to come to an agreement on other tax and non-tax related provisions attached to the bill.

The payroll tax extension would keep Social Security tax at 4.2%, extend unemployment benefits, and prevent cuts to doctors’ medicare payments until a compromise was reached and the bill was extended for a longer period.

There is no guarantee that there will be a compromise from the House of Representatives, but there is hope that pressure from the President and the Senate will further encourage an extension of the payroll tax bill by January 1.

If the payroll tax is not extended, the typical family making $50,000 per year, will lose $40 per paycheck, 3 million people who receive long-term unemployment benefits will see a drop in benefits, and Medicare payments to doctors will be lowered.

How would a $40 loss per paycheck impact you and your family?  What could you do with $40 per paycheck?

The two month extension enables taxpayers to continue to pay the lower 4.2% of earnings instead of 6.2% for an additional two months.  There was some disappointment among Senate leaders since they were unable to agree on a longer-term deal this time, however the two month extension continues to give some relief to families at a time when many are still struggling.

The House is now expected to vote on the two month payroll tax extension deal next week and Congress will be required to revisit the issue in 2012.  At least we can try to relax and enjoy the holidays, knowing that our government will not face shut down and many of us can continue to receive the payroll tax break through February 2012.

Spending/Payroll Tax Bill

The House of Representatives passed the $1.043 trillion spending bill this afternoon.  The bill now will go to the Senate, where Senate leaders are optimistic that the bill will be passed avoiding partial government shutdown at midnight tonight.

The spending bill will fund the government for another fiscal year, through the end of September 2012.  It is unknown if the Senate will be able to tackle the big bill tonight, but the presumption of the bill passing will extend the authorization for government spending 24 more hours in case the Senate is unable to complete the vote tonight.

As explained earlier this week, in our blog “The House Passes the Payroll Tax Bill“, the President called Congress to stay in session until both the spending bill and the payroll tax cut bill passes the Senate since the payroll tax cut measure, a major part of President Obama’s job creation plan, would put $1,000 in an average worker’s pocket and may impact 160 million Amercians.

There is optimism that there will be some way to extend the payroll tax cut bill, which reduces Social Security Tax from 6.2% to 4.2%. Senate talks involve extending the payroll tax cut and some other provisions which are set to expire at the end of this year.

The Senate is still negotiating at this moment on the payroll tax bill due to additional provisions possibly attached to the bill such as the extension of unemployment benefits, the increase in payments to doctors who provide medicare services, and the Keystone XL oil pipeline.

It is unknown at this time whether the Senate will vote on both tax bills today, but check back for more up to date information regarding the spending bill and the payroll tax bill.

Payroll Tax Bill

The tax break is said to put $1,000 in an average workers’ pocket and is thought to impact 160 million Americans.

What’s next?  The payroll tax package goes to the Senate, however the President has threatened to veto the bill as Democrats are opposed to the GOP non-tax related revenue raisers that they don’t think should be added to a payroll tax bill.  One of the priorities added, which is receiving opposition is one to accelerate the Keystone XL oil pipeline from Canada to the U.S.

Bipartisan lawmakers have also reached an agreement on the $1 trillion measure to finance government agencies through September 2012, which would also stop federal government shut down this week, however Democrats are refusing to proceed with the agreement until a final deal is made on the payroll tax measure.

Although, there are a number of additional tax related and non-tax related changes added to the payroll tax bill, no one knows the final tax implications of the additional tax law changes until the bill passes the Senate.

Check back soon to find out the additional tax implications of the payroll tax bill once the Senate reaches an agreement.

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Before you send them a thank you note, however, you should know that they do this because it’s the law.

While this may not ease the sting of seeing a chunk of your take-home pay diverted to yet another government program, count your blessings. Because if you are self-employed, you’ll have to pay the whole thing by yourself.

We’re referring, of course, to what is commonly known as your social security taxes, and officially as F.I.C.A. – from the Federal Insurance Contributions Act tax.

Benefits of your F.I.C.A. Contributions

While you probably understand that your Federal taxes fund your fair share of military spending and the expense accounts of your state’s senators and representatives, it’s easy to forget that your F.I.C.A. taxes bring you an even more direct and personal benefit. Because when you retire, that money comes back to you in the form of a monthly Social Security check, as well as Medicare coverage.

And unlike the benefits that accrue from your income tax, the more F.I.C.A. taxes you pay in, the more you get back. At least, up to a point. The total amount of your retirement benefits depend on the amount of F.I.C.A. contributions made over your working years – both yours and by your employer on your behalf – up to a maximum amount.

Are you a student that is employed by your college? Lucky you. You can avoid F.I.C.A altogether.

The F.I.C.A. Formula

The mechanics of paying F.I.C.A. taxes are simple. If you are employed by someone else, each paycheck will be dinged for 6.2 percent of the gross, plus another 1.45 percent for Medicare. That happens until your annual pay reaches a certain level, after which your contributions cease.

In 2009, that amount was $106,800. Normally the ceiling goes up each year to reflect average household income, but because of the recession there will be no increase for 2010.

No mystery there. Because, unless you are one of those senators, the average household income in 2009 went down.

Employers pay the exact same amount each month as the employee, and on their behalf. This happens behind the scenes, but be clear: the total contribution is what funds your retirement benefits, not just the deduction you see from your paycheck.

Unlike Federal taxes, which are usually eligible as deductions on state tax returns, F.I.C.A. taxes are not deductible for individual tax payers.

However, in the case of someone who works for two or more employers in a given year and the annual total exceeds the limit – each employer must continue to withhold F.I.C.A. until the limit has been reached under their employment – the taxpayer can file for an overpayment refund on their tax return.

F.I.C.A. For The Self-Employed

As if making it on your own wasn’t challenging enough these days, the government still collects the full 15.3 percent F.I.C.A. tax from the self-employed. In other words, the same 6.2 and 1.45 percent employee contribution is still owed, in addition to the matching 6.2 and 1.45 percent for the employer’s portion of the tax.

Because obviously, the self-employed person wears both nametags.

Fortunately, the maximum earnings ceiling still applies. But since many self-employed folks don’t know the exact amount of their earnings until year-end (in the form of net profit), overpayment is commonplace (I setup a “tax fund” online savings account for myself). Once again, the adjustment takes place on the Federal tax form, in this case involving a Schedule C for self-employment income, and a Schedule SE for F.I.C.A. calculation for the self-employed, or for any income that was not subject to Federal withholding.

So if you are prone to feel guilty about all that “free” money arriving in your account each month when you retire, relax. You’ve already paid the tab, and every penny you get is one you’ve earned.