Corporations can treat their contributions to Social Security and Medicare/Medicaid as tax deductions, just like the cost of wages.
Remember also that employees pay half.
And for those of us who are self-employed, we pay the whole load, and the deduction is only useful if we have profit from which to deduct it.
And in fact although collected as taxes, those - at least in theory - are not put to general government purposes like income taxes are, but are instead supposed to held in trust for those who are retired, disabled or impoverished.
Employers and employees pay half, to be sure. There should be no trouble at all for sending those tax revenues into the social security trust fund, which is running a major deficit as you know. I'm not sure where your complaint is coming from.
Granted, I do think the small businesses (especially sole proprietors) are impacted negatively relative to most businesses.
I agree that corporations pay half of an employee's contribution. But payment of social security contributions is NOT the payment of a "tax" on income, and it's deductible, so I was just correcting the overstatement that "corporations are already taxed for paying Social Security benefits."
They are not "taxed" for paying social security if they can deduct it as part of wages. And FICA is not at all dependent on corporate net income.
Just trying to help dispel a common misconception that a corporate employer's FICA contribution is the same as a tax on corporate income, as they are quite distinct.
Just a quick note - anything that's deductible from gross income or net income to arrive at net taxable income isn't "subject to income tax."
If the discussion is focused on income tax, then the millionaires who can hide or defer or legally avoid tax on their personal earnings are being disingenuous when they say they pay taxes when all they are referring to is FICA contributions or the tax withheld on their employees. Those really aren't "their" taxes - they are someone else's, and they are deductions from gross revenue or net income and hence never taxed as "net taxable income" at the corporate level. It's not just tax law but also basic accounting.
I would just say, in closing, that social security taxes and medicare taxes need to be expanded to include incomes at all levels. And so to emulate the European social democracies.
Actually, I agree that the cap on income subject to FICA contributions (taxes) should be raised or outright eliminated, so I think we're on the same page.
I just think it's important to remember that social security and Medicare (FICA) taxes are quite distinct from income tax.
FICA taxes are paid even when no income tax is due, e.g., when an individual has net taxable income below a certain amount or a net loss, whether becasue of small total earnings or because of carefully crafted tax avoidance schemes like Heather noted and that are referenced in her citation to the Guardian article. If I (hypothetically) make less than about 15,000 a year, basic deductions usually get the "hypothetical me" out of having to pay ANY income tax, and whatever got withheld for INCOME tax becomes my tax refund.
But there's no refund for FICA withholding that is taken out of my wages just because my earnings fell below the income threshold for INCOME tax.
Also, I think beginning in the '80s corporations started paying their CEOs in stock options in lieu of huge salaries, and the stock options aren't taxed as far as I know, thus lowering their 'taxable income'. Taxes are probably paid on any capital gains when the recipient sells, but capital gains taxes have been slashed, too. I'm happy to be corrected if I don't have this right.
Well, ALMOST correct. Stock options aren't taxes UNTIL they are exercised. And there are two kinds of stock options, qualified and non-qualified. Non-qualified options are ALWAYS taxable when exercised. I.e., if you are given 1000 stock options at $1 a share and at some point the stock is worth $10 a share and you exercise and sell, you net $9 a share and you owe REGULAR TAX (not capital gains tax) on the $9 a share.
Yes. The money employers pay into Social Security is treated by the employer (correctly) as part of the employee’s compensation. So, roughly 14% of the employee’s compensation goes for FICA taxes before the employee even starts to pay income taxes. The wealthy, on the other hand, employ capital gains tax rates and other loopholes to reduce their federal income taxes to an average of 14% of their entire income (including FICA, which because of the FICA tax cap at about $120K of income, is close to 0% of their total income). In other words, federal income taxes, rather than being progressive, are actually regressive when you compare what the wealthy pay to what median income wage earners pay.
Actually, even the money you pay into FICA is also taxed for federal income tax purposes. You do NOT get to exclude FICA from your taxable income, so you are paying the Social Security and Medicare taxes, and then paying income tax on that same amount. Your company (which matches the FICA taxes) gets to deduct the FICA tax from its income as a business expense (just as it deducts your salary payments from its income as a business expense). You however pay your income tax on your total earning INCLUDING the amount deducted for FICA. What is even more "interesting" is that when you are paid Social Security payments when you retire, you pay income tax on those payments too. So in some ways, the money used to cover your social security paymennts is taxed twice, once when it is paid to you when you earn your salary and then again when you get paid in retirement.
I recall Warren Buffet saying the woman who cleans his wastebasket pays a higher share of income as tax than he, and that without lawyerly legerdemain.
Depends on what you mean. It is legally called a "trust fund" because the moneys are theoretically "held in trust" to be paid to the individuals when they retire. Actual practice is that all federal funds are commingled and it is just a ledger entry that you have so much money "on account" for your retirement. And remember that at least at this time in history, you will be paid a fixed amount every month when you finally retire and start collecting Social Security regardless of how much you actually paid in. So depending on how long you live, you may easily end up "losing" money (if you die soon after your retire) or "making" money (if you live until you are 90+ or so. It varies for each person depending on how much they contributed and how much they earned in their last 10 years of income (what your retirement income is based on).
Have you ever run or owned a Corporation Matt? I've been involved with 8 start-ups. During the first 3-5 years most corporations are in business, one bad decision or one sale gone bad can bankrupt a company. Of the 8 startups I have been involved with 3 are still in business all of which were sold to larger competitors. The other 5 went under. So you're saying that if one of these companies finally turns the corner and has a bad year, they should pay more SS tax?
If the government had invested our SS contributions in 10 year rolling T-bills then it would be solvent, but instead they used it for general purposes with zero return to SS.
Corporations can treat their contributions to Social Security and Medicare/Medicaid as tax deductions, just like the cost of wages.
Remember also that employees pay half.
And for those of us who are self-employed, we pay the whole load, and the deduction is only useful if we have profit from which to deduct it.
And in fact although collected as taxes, those - at least in theory - are not put to general government purposes like income taxes are, but are instead supposed to held in trust for those who are retired, disabled or impoverished.
Employers and employees pay half, to be sure. There should be no trouble at all for sending those tax revenues into the social security trust fund, which is running a major deficit as you know. I'm not sure where your complaint is coming from.
Granted, I do think the small businesses (especially sole proprietors) are impacted negatively relative to most businesses.
I agree that corporations pay half of an employee's contribution. But payment of social security contributions is NOT the payment of a "tax" on income, and it's deductible, so I was just correcting the overstatement that "corporations are already taxed for paying Social Security benefits."
They are not "taxed" for paying social security if they can deduct it as part of wages. And FICA is not at all dependent on corporate net income.
Just trying to help dispel a common misconception that a corporate employer's FICA contribution is the same as a tax on corporate income, as they are quite distinct.
Thanks. You know more about this than I do.
No problem -
Just a quick note - anything that's deductible from gross income or net income to arrive at net taxable income isn't "subject to income tax."
If the discussion is focused on income tax, then the millionaires who can hide or defer or legally avoid tax on their personal earnings are being disingenuous when they say they pay taxes when all they are referring to is FICA contributions or the tax withheld on their employees. Those really aren't "their" taxes - they are someone else's, and they are deductions from gross revenue or net income and hence never taxed as "net taxable income" at the corporate level. It's not just tax law but also basic accounting.
I would just say, in closing, that social security taxes and medicare taxes need to be expanded to include incomes at all levels. And so to emulate the European social democracies.
But I think you will disagree with this premise.
Actually, I agree that the cap on income subject to FICA contributions (taxes) should be raised or outright eliminated, so I think we're on the same page.
I just think it's important to remember that social security and Medicare (FICA) taxes are quite distinct from income tax.
FICA taxes are paid even when no income tax is due, e.g., when an individual has net taxable income below a certain amount or a net loss, whether becasue of small total earnings or because of carefully crafted tax avoidance schemes like Heather noted and that are referenced in her citation to the Guardian article. If I (hypothetically) make less than about 15,000 a year, basic deductions usually get the "hypothetical me" out of having to pay ANY income tax, and whatever got withheld for INCOME tax becomes my tax refund.
But there's no refund for FICA withholding that is taken out of my wages just because my earnings fell below the income threshold for INCOME tax.
Also, I think beginning in the '80s corporations started paying their CEOs in stock options in lieu of huge salaries, and the stock options aren't taxed as far as I know, thus lowering their 'taxable income'. Taxes are probably paid on any capital gains when the recipient sells, but capital gains taxes have been slashed, too. I'm happy to be corrected if I don't have this right.
Well, ALMOST correct. Stock options aren't taxes UNTIL they are exercised. And there are two kinds of stock options, qualified and non-qualified. Non-qualified options are ALWAYS taxable when exercised. I.e., if you are given 1000 stock options at $1 a share and at some point the stock is worth $10 a share and you exercise and sell, you net $9 a share and you owe REGULAR TAX (not capital gains tax) on the $9 a share.
Lordy, my hero
Yes. The money employers pay into Social Security is treated by the employer (correctly) as part of the employee’s compensation. So, roughly 14% of the employee’s compensation goes for FICA taxes before the employee even starts to pay income taxes. The wealthy, on the other hand, employ capital gains tax rates and other loopholes to reduce their federal income taxes to an average of 14% of their entire income (including FICA, which because of the FICA tax cap at about $120K of income, is close to 0% of their total income). In other words, federal income taxes, rather than being progressive, are actually regressive when you compare what the wealthy pay to what median income wage earners pay.
Actually, even the money you pay into FICA is also taxed for federal income tax purposes. You do NOT get to exclude FICA from your taxable income, so you are paying the Social Security and Medicare taxes, and then paying income tax on that same amount. Your company (which matches the FICA taxes) gets to deduct the FICA tax from its income as a business expense (just as it deducts your salary payments from its income as a business expense). You however pay your income tax on your total earning INCLUDING the amount deducted for FICA. What is even more "interesting" is that when you are paid Social Security payments when you retire, you pay income tax on those payments too. So in some ways, the money used to cover your social security paymennts is taxed twice, once when it is paid to you when you earn your salary and then again when you get paid in retirement.
Yes.
I recall Warren Buffet saying the woman who cleans his wastebasket pays a higher share of income as tax than he, and that without lawyerly legerdemain.
Is there really a trust fund? I've read that there is no trust fund, but merely an accounting ledger.
Depends on what you mean. It is legally called a "trust fund" because the moneys are theoretically "held in trust" to be paid to the individuals when they retire. Actual practice is that all federal funds are commingled and it is just a ledger entry that you have so much money "on account" for your retirement. And remember that at least at this time in history, you will be paid a fixed amount every month when you finally retire and start collecting Social Security regardless of how much you actually paid in. So depending on how long you live, you may easily end up "losing" money (if you die soon after your retire) or "making" money (if you live until you are 90+ or so. It varies for each person depending on how much they contributed and how much they earned in their last 10 years of income (what your retirement income is based on).
Have you ever run or owned a Corporation Matt? I've been involved with 8 start-ups. During the first 3-5 years most corporations are in business, one bad decision or one sale gone bad can bankrupt a company. Of the 8 startups I have been involved with 3 are still in business all of which were sold to larger competitors. The other 5 went under. So you're saying that if one of these companies finally turns the corner and has a bad year, they should pay more SS tax?
If the government had invested our SS contributions in 10 year rolling T-bills then it would be solvent, but instead they used it for general purposes with zero return to SS.
That’s why negative K1 exemptions are in place