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Encyclopedia > Payroll tax in the United States
Taxation in the United States

This article is part of the series:
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Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... The Great Seal of the United States, obverse side. ... Federal courts Supreme Court Chief Justice Associate Justices Elections Presidential elections Midterm elections Political Parties Democratic Republican Third parties State & Local government Governors Legislatures (List) State Courts Counties/Parishes/Boroughs, Cities, and Towns Other countries Politics Portal      Politics of the United States takes place in a framework of a presidential...


Federal taxation
Internal Revenue Service
Tax forms
Income tax  ·  Payroll tax
Alternative Minimum Tax
Estate tax  ·  Excise tax
Gift tax  ·  Corporate tax
Capital gains tax
State & local taxation
State income tax
Sales tax  ·  Use tax
State tax levels
Property tax
Federal tax reform
FairTax  ·  Flat tax
Tax protester arguments
Constitutional
Statutory  ·  Conspiracy
Part of the Taxation topic
see also: Taxation in other countries
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The Federal Insurance Contributions Act (FICA) tax, a kind of payroll tax, is a United States employment tax imposed in an equal amount on employees and employers to fund federal programs for retirees, the disabled, and children of deceased workers. The FICA tax pays for Social Security and Medicare. The Federal Insurance Contributions Act is codified as 26 U.S.C. ch.21. Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... Seal of the Internal Revenue Service The Internal Revenue Service (IRS) is the United States federal government agency that collects taxes and enforces the internal revenue laws. ... Seal of the Internal Revenue Service Tax forms in the United States are used by taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service (IRS). ... The United States imposes an income tax on the taxable income of individuals, corporations, trusts, decedents estates and certain bankruptcy estates. ...        Alternative Minimum Tax (AMT) is a tax system that is part of the federal income tax system in the United States. ...        The estate tax in the United States is a tax imposed on the transfer of the taxable estate of a deceased person, whether such property is transferred via a will or according to the state laws of intestacy. ...        Look up Excise tax in the United States in Wiktionary, the free dictionary. ... Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. ...        Corporate tax in the United States is a tax on the taxable income of a C corporation or an entity taxed as a C corporation. ... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... State income tax is an income tax in the United States that is levied by each individual state. ... A sales tax is a tax on consumption and is normally a certain percentage that is added onto the price of a good or service that is purchased. ... A use tax is a type of excise tax levied in the United States. ... State tax levels indicate both the tax burden and the services a state can afford to provide residents. ... Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. ... Tax reform is the process of changing the way taxes are collected or managed by the government. ... The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan. ... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ... Tax protester arguments are a number of heterodox theories that deny that a person has a legal obligation to pay a tax for which the government has determined that person is liable. ... Tax protesters in the United States make a number of statutory arguments that the assessment of the income tax in the United States violates the statutes enacted by the United States Congress and signed into law by the President. ... Tax protester conspiracy arguments are arguments raised by tax protesters that assert that the imposition of the income tax in the United States is the result of some kind of illicit conspiracy. ... This article is the current Taxation Collaboration of the Month. ... A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). ... Social Security in the United States is a social insurance program funded through dedicated payroll taxes called FICA (Federal Insurance Contributions Act). ... President Johnson signing the Medicare amendment. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...


Social Security benefits include old-age, survivors, and disability insurance (OASDI). Medicare is the hospital insurance portion. Look up disability in Wiktionary, the free dictionary. ... Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. ...

Contents

How the tax is calculated

Overview

The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes.[1] The FICA tax is considered a regressive tax on income (with no standard deduction or personal exemption deduction) and is imposed (for the year 2006) only on the first $94,200 of gross wages. The tax is not imposed on investment income (such as interest and dividends). The Center on Budget and Policy Priorities (CBPP) describes itself as a policy organization . ... A regressive tax is a tax imposed so that the tax rate decreases as the amount to which the rate is applied increases. ...


"Regular" employees (most wage-earners)

For 2006, the employee's share of the Social Security portion of the tax is 6.2% of gross compensation up to a limit of $94,200 of compensation. This limit, known as the Social Security Wage Base, goes up each year based on average national wages and, in general, at a faster rate than the Consumer Price Index (CPI-U). For 2007 the limit will rise 3.5 percent to $97,500 according to a late 2006 announcement by the Social Security Administration. The employee's share of the Medicare portion is 1.45% of wages with no limit. The employer is also liable for separate 6.2% and 1.45% Social Security and Medicare taxes, respectively, making the total Social Security tax 12.4% and the total Medicare tax 2.9% of wages. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% + 2.9%), since they are both the employer and the employed; however, see the section on self-employed people for more details.) For the OSADI or Social Security system, the SSWB or the Social Security Wage Base is the maximum earned income or upper threshold on which a wage earners FICA or Social Security tax may be based. ... In economics, a consumer price index (CPI) or retail price index (RPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. ... The United States Social Security Administration (or SSA[1]) is an independent agency of the United States government established by a law currently codified at 42 U.S.C. Â§ 901. ...


If a worker starts a new job halfway through the year and has already earned the wage base limit for Social Security, the new employer is not allowed to stop withholding it until the wage base limit has been earned with them. There are some cases, such as a successor-predecessor transfer, in which the payments that have already been withheld can be counted toward the year-to-date total. For the album by the Kaiser Chiefs see Employment (album) Employment is a contract between two parties, one being the employer and the other being the employee. ... In the US, this refers to a deduction from an employees salary by an employer for federal, state and local tax liabilities. ...


If a worker has overpaid toward Social Security by having more than one job or by having switched jobs during the year, that worker will get a refund when they file their Federal income tax return. In the United States, taxpayers will get a tax refund, a refund on their U.S. income tax, if the tax they owe is less than the sum of: The total amount of refundable tax credits that they claim. ... The United States imposes an income tax on the taxable income of individuals, corporations, trusts, decedents estates and certain bankruptcy estates. ...


Self-employed people

Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% [Soc. Sec.] + 2.9% [Medicare]); however, the 15.3% multiplier is applied to 92.35% of the business's net profit, rather than 100%; the difference, 7.65%, is half of the 15.3%, and makes the calculation fair in comparison to that of regular (non-self-employed) employees. It does this by adjusting for the fact that employees' 7.65% share of their FICA tax is multiplied against a number (their gross income) that does not include the employer's half of their FICA tax. In simpler words, it makes the calculation fair because employees don't get taxed on their employers' contribution of the second half of FICA, therefore self-employed people shouldn't get taxed on the second half either. Similarly, self-employed people also deduct half of their self-employment tax (schedule SE) from their gross income on the way to arriving at their adjusted gross income (AGI). Again, this evens the playing field with regard to regular employees, who don't pay general income tax on their employers' contribution of the second half of FICA, just as they didn't pay FICA tax on it either.[2][3]


These calculations are made on Schedule SE: Self-Employment Tax, although that is not readily apparent to novice self-employed taxpayers, owing to the schedule's rather opaque name, which makes it sound like it is part of the general federal income tax, when in fact it is only to calculate the FICA contribution. Some taxpayers have complained that Schedule SE's title should be changed to something such as "Self-Employment FICA Tax", so that its separateness from the general income tax is apparent.[4]


Exemption for certain full-time students

A special case in FICA regulations includes exemptions for student workers. Students enrolled full-time in a university and working part-time for the same university are exempted from FICA payroll taxes, so long as their relationship with the university is primarily an educational one.


History

Prior to the Great Depression, the following economic problems posed great hazard for working-class Americans: The Great Depression was a time of economic down turn, which started after the stock market crash on October 29, 1929, known as Black Tuesday. ...

  • The U.S. had no federal-government-mandated retirement savings; consequently, for many workers, the end of their working career was the end of all income.
  • Similarly, the U.S. had no federal-government-mandated disability income insurance to provide for workers who suffered injuries that left them disabled; consequently, for many workers, a bad injury meant no more income.
  • In addition, there was no federal-government-mandated disability income insurance to provide for people who would never be able to work in their lives, such as anyone born with severe or profound mental retardation.
  • Finally, the U.S. had no federal-government-mandated health insurance for the elderly; consequently, for many workers, the end of their working career was the end of their ability to pay for medical care.

The New Deal introduced Social Security in the 1930s to rectify the first three problems listed above (retirement, injury-induced disability, and congenital or other disability). It introduced the FICA tax as the means to pay for Social Security. This page is a candidate for speedy deletion. ... This page is a candidate for speedy deletion. ... Mental retardation is a term for a pattern of persistently slow learning of basic motor and language skills (milestones) during childhood, and a significantly below-normal global intellectual capacity as an adult. ... The New Deal was the title President Franklin D. Roosevelt gave to the series of programs initiated between 1933–1938 with the goal of relief, recovery and reform of the United States economy during the Great Depression. ... Social Security in the United States is a social insurance program funded through dedicated payroll taxes called FICA (Federal Insurance Contributions Act). ...


Medicare came later, in the 1960s, to rectify the fourth problem listed (health care for the elderly). The FICA tax was increased in order to pay for this unfortunate-but-inevitable expense. President Johnson signing the Medicare amendment. ...


Criticism

Role of government

The FICA tax provides funding for social services that are generally considered a safety net for retirement and medical care. The tax forces citizens to do two things that many people often choose not to do for themselves until it is too late: buy insurance against risks, and save for retirement. The absence of insurance and retirement savings can lead to poverty. Some criticism arises with the constraint of being forced to contribute to these services, arguing these services should not be mandated by law and debating the role and authority of government to force such programs. It is acknowledged that left to their own devices, people may fail to buy adequate insurance or save for retirement, a problem avoided to some degree by the FICA tax. However, these critics argue that the ideal of individual freedom allows one to make such choices.


Other criticism questions the government running the programs, arguing that the government should simply supply the mandate and let commercial institutions supply the services, allowing the advantages of markets to operate. An analogy is auto insurance. The argument is that although some states mandate that drivers purchase auto insurance, this has nothing to do with the state government also being the insurance company. Commercial companies supply the service, compete with each other, and are motivated by profit margin. This method is considered preferable by some free market advocates under the theory that competition and profit, as market forces, motivate companies to operate properly and efficiently. Some Americans therefore feel that the Social Security and Medicare programs could benefit from following the model of government-mandates-but-industry-supplies. Under this argument, the programs could be implemented by continuing to collect the FICA tax but also giving workers choices over which company is used. Recent debates in Congress center around the choice of citizens on where to invest their social security funds, as government returns on the levied investment produce a much smaller return than what would be gained by allowing select investment in the private market. Some people contend that putting such crucial public programs in the hands of private interests would make the programs vulnerable to the whims of entrepreneurs. Under this argument, an entrepreneur who finds that the interest of the citizen-consumer and his or her own corporation's profitability conflict may sacrifice the public interest in favor of profitability. A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... Type Bicameral Houses Senate House of Representatives United States Senate Majority Leader Harry Reid, D since January 4, 2007 Speaker of the House Nancy Pelosi, D since January 4, 2007 Members 535 plus 4 Delegates and 1 Resident Commissioner Political groups (as of November 7, 2006 elections) Democratic Party Republican...


Regressive

The Social Security contributions in the FICA tax are generally considered regressive, meaning the tax rate progresses from high to low as income increases. The rate is 12.4% on an amount of income adjusted annually for inflation (e.g., $94,200 for the year 2006). Half of the tax is withheld from the employee's pay with the other half being paid by the employer. By contrast, self-employed individuals pay the entire amount of applicable tax (on the annually adjusted income amount). However, whether this tax should properly be called regressive is disputed because the untaxed income cannot be counted in the benefit formula for computing retirement benefits (meaning the redistribution of the tax is progressive, giving a higher percentage to those with low income). Therefore, this limit could be taken as a penalty on high-income earners (they are denied the ability to fully participate in the Social Security retirement program and receive no benefit from Medicare). Conversely, it is argued that they can invest the untaxed portion of their income and earn higher returns than a majority of recipients earn on the money they contribute to that program. A regressive tax is a tax imposed so that the tax rate decreases as the amount to which the rate is applied increases. ... A progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases. ...


See also

A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. ... The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan. ... Form W-2 is used in the United States income tax system to report wages paid to employees and the taxes withheld from them. ... An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. ... UK Income Tax and National Insurance (2005–2006) UK Income Tax and National Insurance as a % of Salary (2005–2006) National Insurance is a system of taxes, and related social security benefits, that has operated in the United Kingdom since its introduction in 1911, and wider extension by the government... In the United States, a credit score is a number typically between 300 and 850, based on a statistical analysis of a persons credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her bills. ...

References

  1. ^ Studies Shed New Light on Effects of Administration's Tax Cuts by David Kamin and Isaac Shapiro, Center on Budget and Policy Priorities, Revised September 13, 2004
  2. ^ I am self-employed. How do I pay Social Security tax?. Social Security Administration. Retrieved on April 28, 2007.
  3. ^ Self-Employment Tax. Internal Revenue Service. Retrieved on April 28, 2007.
  4. ^ http://answers.google.com/answers/threadview?id=493077 A discussion in which self-employed people helped each other make sense of the tax universe

September 13 is the 256th day of the year (257th in leap years). ... shelby was here 2004 (MMIV) was a leap year starting on Thursday of the Gregorian calendar. ... April 28 is the 118th day of the year (119th in leap years) in the Gregorian calendar, with 247 days remaining. ... 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... April 28 is the 118th day of the year (119th in leap years) in the Gregorian calendar, with 247 days remaining. ... 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ...

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