How can I compare my current tax exempt salary and benefits to job offers back in the States?
January 28, 2009 by Tax Blog
Filed under Questions & Answers
I am trying to find out a way to compare my current NET income to what I could potentially NET back home. All of the salary comparison websites do not accurately calculate my tax exemption status and cost of living (lower) here in Germany.
My guess is that I’ll need to almost double my salary as I’m not paying most taxes here in Germany. Here’s some more info about my situation.
1. Income tax exemption – I don’t pay US or German income taxes. I’m exempt from both. I’m not paying US state income taxes either. This probably saves me at least 30% every year.
2. Sales taxes – I only pay sales taxes when I eat at a restaurant or shop for groceries on the economy (a german grocery store). I mostly shop at the commissary on base…and they sell everything at cost…you can’t get groceries cheaper anywhere else. All other goods (utilities, clothing, cars, electronics, etc) are tax exempt. I prepay for gasoline (current US national average price without sales tax).
Any suggestions?
I’m not a GS employee (civil servant) or in the military. I work for a private contractor. I file the 2555 with my 1040 every year. My taxable income is just below the allowed amount.
I am paying Social Security and Medicare.
I also have 3 dependents. My wife also works for a private contractor and is tax exempt.
I file EXEMPT on my W4. That way taxes are not taken from my paycheck. That’s what we call exempt status here. Call it what you want. We’re given a 3 month extension to file for being overseas.
IT Problems at IRS and Medicare : More to Come?
Already in 2006 alone, the IRS has potentially lost billions of dollars in revenue by failing to come up with a computer program that would replace one that identified returns likely to be fraudulently filed, while Medicare and Social Security have mistakenly sent refunds to 230,000 people who signed up for a prescription drug plan under the new Part D of Medicare. It is likely that these stories are symptoms of a much more serious government problem in hiring and retaining top-notch people who keep up with new technology, its uses, and its limitations.
President Bush Supports a Tax Hike
And you thought the day would never come: earlier this week, President Bush signed into law a bill that (gasp) increases federal taxes. The bill, HR 6081, known as the “Heroes Earnings Assistance and Relief Tax Act,” creates or extends a host of special tax breaks for military members and their families, which in itself is a move no sane member of Congress would oppose. But heretically, the bill pays for its tax cuts by closing an existing tax loophole.
The tax break in question, which Talking Taxes discussed in detail a few months back, allowed KBR, a former subsidiary of the Halliburton company, to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees were working for a Cayman-Islands based “shell company.”
Just as tax breaks for the military have no enemies (the House voted unanimously on this one), the KBR payroll tax dodge had no friends. So for any head of state not guided by the “no new taxes” mantra, signing this bill would be a no-brainer. But in this case, we’ll call it a pleasant surprise.
Now, as the NWLC’s Joan Entmacher asks, why can’t we get Congress and the President to apply the same logic to the egregious “carried interest” tax break for hedge fund millionaires?
SELF EMPLOYMENT TAX VS FICA TAX
All workers are required to pay into the Social Security system – unless you work for the government or some non-profit organizations. Employees have FICA (Social Security and Medicare) Tax withheld from their wages. Employers must match the amount withheld. Individuals with “net earnings from self-employment” pay the Self-Employment Tax – which is actually FICA Tax. However they must pay “both halves” of the FICA tax (the equivalent of the employee’s share and the employer’s share).
In reality self-employed individuals actually pay only 14.13% on “net earnings from self-employment”, as the 15.3% is only applied to 92.35% of their net Schedule E (or K-1) earnings. Plus they are allowed an “above-the-line” deduction for ½ of their Self-Employment Tax – so the actual effective tax rate depends on their federal income tax rate. taking into account the 50% self-employment tax adjustment to income, the “effective” cost of your self-employment tax is –
* 15% Bracket = 13.07%
* 25% Bracket = 12.36%
* 28% Bracket = 12.15%
The “Fix The Tax Code Friday” topic at Kelly Phillips Erb’s TAXGIRL blog today is “Fix the Tax Code Friday: SE Tax”. She asks the question – “Should self-employed persons be allowed to opt out of paying self employment tax (and thus, collecting Social Security benefits and the like)?”.
In my comment on the question submitted at TAXGIRL I said that “My answer is yes – but only if “normal” W-2 employees were similarly able to “opt out” of Social Security. As long as one class of worker is required to participate it should be mandatory for all classes.
I also support private Social Security accounts – not invested in the stock market, but in the money market or Treasury securities market.”
If I was able to invest all the money that I paid into the Social Security system over the years, and all future payments, in a 5% money market account or bank CD I would have a lot more money at retirement than I will be collecting from Social Security.
In addition – if I apply for Social Security and get my first check and then drop dead the next day, all the money I paid into the system will not go to my beneficiaries but to other SS recipients. All the money will be lost! If I had instead invested the money in a private account the balance would pass on to my sister and other relatives.
My comment goes on to say – “The self-employment tax calculation should be corrected to bring it in line with the treatment allowed a one-man corporation. In a one man corporation all employee benefits provided to the owner, like health insurance and pension contributions, reduce {the money available to pay} the owner’s salary. FICA tax is only assessed on the actual salary.
With a self-employed individual, the SE tax is imposed on net profit of the business before deducting the self-employed health insurance premiums and pension contributions for the self-employed person and the ½ of SE tax.
Owner health insurance premiums and pension contributions should be Schedule C deductions and not adjustments to income.”
In the case of two self-employed individuals with the exact same income and expenses – one filing Schedule C and one incorporated – the Schedule C filer will pay a lot more in Self-Employment Tax than the incorporated business owner will pay in employee and employer FICA tax. Is that fair?
So how would you answer Kelly’s question – and what do you think of my suggestions?
S Corp Draw
January 27, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from VP in California who tells us. “I am VP of an S Corp. I do not draw a salary, but the president does. Does the dollar amount of owner’s draw affect taxes in any way?”
Dear VP,
I guess I am confused. There’s no such thing as an owner’s draw in an S corp. It’s either wages or dividends. Worst case, money drawn can be consulting fees. But that’s not the best idea.
If the company has enough money to pay the president enough to live on, the president should be on payroll. You will be attracting an audit and taxes, penalty and interest if you don’t establish a payroll – and fast.
As an officer, a Vice President, you are responsible for the company being properly administered – even if you don’t get paid. If IRS conducts an audit and determines that there should have been payroll, and all the related payroll taxes, YOU can be held personally liable for paying those taxes if the company doesn’t pay them. Incidentally, if IRS audits and determines this is payroll, you’ll owe all the same kinds of bucks to California, too. This is not a smart arrangement.
Right now, BEFORE the tax return is prepared, you need to recharacterize the money the president has taken as a draw. It should properly be payroll – you still have time to file a 4th quarter payroll tax return to fix this problem.
If not, it should be outside services – which means the president will have to personally pay both sides of the Social Security/Medicare taxes – total 15.3%, instead of the company paying their half when she’s on payroll.
It could be a loan – in which case you need a legal document spelling it out as a loan, with an interest rate, and repayment terms. And it must be repaid.
This is the kind of thing that really, really should have been worked out when you two started the company – not the following year, when it’s time to file tax returns.
Basically, you really need to have a tax professional come in and look at what you gals did with the books and clean them up before the S Corp tax returns need to be filed in March.
And remember, you can find answers to all kinds of questions about S Corporations and other tax issues, free. Where? Where else? At TaxMama.com
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
File Download (0:00 min / 1 MB)
Outline of Economic Recovery Package from House Ways and Means Committee
January 27, 2009 by Tax Blog
Filed under Questions & Answers
An outline of the provisions under the Ways and Means Committee’s Jurisdiction included in the Economic Recovery package follows:
Tax Relief for Individuals
· “Making Work Pay Credit”
· Expand Earned Income Tax Credit (EITC)
· Increase in child tax credit, $0 floor
Education
· Simplification of education credits w/ $2,500 credit for first four years of higher education expenses (increase income limitations), with credit partially-refundable (40% refundable)
Housing
· Remove repayment requirement on $7,500 first-time home buyer credit for homes purchased after 2008 and before termination of credit (June 30, 2009)
· Coordination provisions with new grant program for low-income housing being designed by the Financial Services Committee
Business
· Bonus depreciation
· 5-year carryback of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, Freddie Mac)
· Extension of increased small business expensing
· Expand work opportunity tax credit for disconnected youth and unemployed, recently-discharged veterans
· Prospectively repeal Treasury Section 382 ruling
State and Local Governments
· Allow financial institutions to purchase State and local bonds and other changes
· Repeal AMT limits on new private activity bonds
· Taxable bond option for governmental bonds
· School construction bonds
· One year deferral of withholding tax on government contractors
Distressed Areas
· Provide tax exempt bonds and tax credit bonds to “recovery zones.” These tax exempt bonds and tax credit bonds can be used for a wide array of purposes to stimulate economic development, including job training and education. A “recovery zone” would be an area within a State, city or county that has exhibited high unemployment, foreclosures or poverty. These bonds would be allocated automatically to States and large municipal governments based on the number of unemployed individuals within that area.
Energy Tax Incentives
· Long-term extension of renewable energy production tax credit
· Temporary election to claim the investment tax credit in lieu of the production tax credit
· Coordination provisions with new grant program for renewable energy projects being designed by the Energy and Commerce Committee (sections 45 and 48 projects)
· Clean Renewable Energy Bonds (“CREBs”)
· Qualified Energy Conservation Bonds
· Energy efficiency and conservation tax incentives under sections 25C, 25D and 48
· Smart energy conservation, energy efficiency, and renewable energy R&D credit
· Refueling property credit expansions
Trade Adjustment Assistance (TAA)
Updates, modernizes and expands TAA to cover service workers, and substantially improves and extends coverage to manufacturing workers
Triples funds for job training
Unemployment Insurance (UI)
· Encourage UI Modernization
· Continue the Emergency Unemployment Compensation Program
· Increase UI checks by $25/week
Additional Temporary Assistance for Needy Families (TANF)
· Provide additional TANF Contingency Funds to serve needy families
Supplemental Security Income (SSI)
Provide a one-time additional SSI Payment to Low-Income elderly and disabled recipients
Child Support Enforcement Funding
· Restore federal funding for Child Support Enforcement for 2 years
COBRA Healthcare for the Unemployed
· Provides temporary subsidies for health insurance coverage to those who have lost their jobs.
· Extends the availability of unsubsidized COBRA coverage for older and tenured workers beyond the 18 months provided under current law
Health Information Technology (HIT)
Establishes standards, payment incentives and privacy protections to encourage the widespread adoption of health information technology.
Extends Moratorium on Selected Medicare Regulations through October 1, 2009
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- House Ways and Means Committee :: Outline of Economic Recovery Package
How much tax should he send to the IRS for the first quarter?
January 27, 2009 by Tax Blog
Filed under Questions & Answers
Darrell owns a consulting business and has an estimated annual income of $63,000. His
Social Security tax is 12.4%, Medicare is 2.9%, and his estimated federal income tax rate
is 22%. How much quarterly estimated tax must Darrell send to the IRS for the first
quarter?
A. $5,874.75 C. $15,750.00
B. $13,860.00 D. $23,498.99
How Federal tax is calculated for whithholding from paycheck?
January 25, 2009 by Tax Blog
Filed under Questions & Answers
I couple of related questions:
1- Is there a formula that is used to calculate federal tax that is going to be whithheld from every paycheck? I understand it is based on W-4 form enteries, frequency of the paycheck (weekly, biweekly etc) and the tax bracket related to the taxable income but can someone please tell me what that formula is in terms of math denotation/expression? e.g. tax to be withheld = a x b/xy where a, b, x, y are various variables and what those variables are.
2- When Fed tax is withheld, is it withheld against the gross income for that period or the gross income minus FICA (ss and medicare tax) and/or medical health insurance premium? I understand that in case of 401k contributions, gross income minus 401k contribution = taxable income, which is then used to calculate FICA and so on. Similiarly, is state tax withheld against the gross income or gross income minus fica minus fed tax?
Thanks in advance.
Will Obama “Bend the Curve” on Entitlement Spending?
I am sure Barack Obama will deliver a stirring Inaugural address tomorrow. However, Obama’s most important remarks since his election came in an interview the other day with The Washington Post. There, he promised to convene a bipartisan fiscal summit in February. This has the potential to be the most important step of his Presidency. Yes, at least as important as fixing the immediate economic mess.
It is not the idea of a summit that is so critical—we’ve seen plenty of those in recent years. Nor was it his vow to use some of his copious political capital to confront the controversial issues of Medicare, Medicaid, and Social Security. We’ve heard that promise before too. It was just four years ago that George Bush made precisely the same vow to tackle Social Security. And we all know how that one ended up.
No, it is neither the summit nor the confident commitment that is so important. It is instead, the language he used in his meeting with The Post.
In his discussion of Medicare, for instance, Obama was channeling Peter Orszag, his nominee for Budget Director. When he says, “You can’t solve Medicare in isolation from the broader problems of the health-care system,” that is pure Orszag. So is his talk of “bending the curve” of medical spending (econo-speak for sharply slowing the rate of health cost growth).
Orszag’s (and now Obama’s) diagnosis is on the mark. The cure, however, will be exceedingly difficult.
And it will take a lot more than fine words.
On Social Security, for instance, Obama breezily told The Post, “Social Security, we can solve.” No problem.
Well, he’ll have to do a lot more than what he promised in the campaign, when his plan centered on rising payroll taxes for a handful of wealthy workers—two years after the end of his second term. That is no way to fix Social Security.
By now, I’m sure Obama knows that in any bipartisan deal, reducing promised future benefits will have to be part of the mix. Period. And that is going to seriously antagonize his friends on the left. On the other hand, Obama is correct when he recognizes that Social Security is the easy bet in the entitlement trifecta.
When it comes to Medicare, “bending the curve” means rationing care. It means, somehow, convincing Americans that the most expensive treatment is not always (or even often) the best care. It means telling them, for example, that Medicare is not going to pay for that back surgery because exercise and anti-inflammatory drugs work just as well, and at far less cost. That is going to anger patients and doctors.
Long-term fiscal reform also means sensible tax policy. And by promising to exempt anyone making up to $200,000 from any tax increases, Obama has built himself something of a fiscal box. I’m sure Orszag and others have told him that by now as well.
Still, the post-election Obama sounds like he gets it, or, at least for now, he’s listening to people who do. Let’s all hope it lasts.
Two-Thirds of Tax Units Pay More Payroll Tax Than Income Tax
April 15 is synonymous with taxes in the United States, but most Americans actually pay more payroll taxes than federal income taxes. In 2006 workers and employers each paid 6.2 percent Social Security tax on the first $94,200 of earnings and 1.45 percent Medicare tax on all wages. While the statutory obligation to pay payroll taxes is split evenly between workers and employers, most economists believe that the employer tax usually translates into lower wages, so workers bear the full burden of the tax. Thus, the total payroll tax rate equals 15.3 percent of earnings for most workers.