Social Security Started Over

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

What Tax Bracket Am I In?

Q. I had a question about my W-4 form. I received my paycheck and it seems that I am paying almost 30% of taxes and since I am making only 30K a year, the taxes seem ridiculously high. I was wondering what I should fill out in the W-4 form that would lower my taxes. I am claiming myself as a dependant on my domestic partner. So please let me know what information I should fill out to make sure that I am taxed in the right bracket (which should only be 15-20%).

A. This is another very common question.  Your tax bracket or marginal rate is a fictional number arrived at by dividing total taxes paid by total income.  To correctly determine your tax bracket though, you need to look at what taxes go into that number to get an accurate picture.  First, Social Security and Medicare are part of the taxes that everyone pays until they reach $102,000 of taxable income (for 2008).  These taxes together account for 7.65% of your income.  The tax bracket that you speak about does not include these taxes normally.  Now we are left with around 22% for federal and state taxes.  You did not identify your state so there is no way to figure out this number.  However, for federal purposes, domestic partners can be classified as dependents only if you provide the majority of the support for them. Someone who is single making around $30,000 per year with one dependent would pay around $3600 of taxes.  This equates to about 12%.  Your state income tax will add to this. If you live in Maryland, Pennsylvania, New York, Ohio, Kentucky, Michigan or Indiana (plus a few others), you also are required to pay local taxes.  Other states have similar additional taxes.  When you add them all up, the combination of Federal, Social Security, Medicare, State and potentially local taxes, the number gets to be quite high.  This could be as much as 30% or more!

There is a second part to your question though.  The object is to match your payments (withholding) with your liability (calculated on the 1040 form).   If you find that every year you continue to get large federal and/or state tax refunds, you may wish to adjust your W-4 accordingly.  Claiming more allowances on the W-4 reduces federal withholding.  Claiming less allowances increases withholding.  Keep in mind that you will need to sign a statement before handing the form to your payroll rep that declares you are entitled to the number of allowances claimed.