JANUARY 21ST, 2011
By CPA SAM
By now, most employees in the United States have received their first paycheck of 2011. About the same time the first check is received, payroll departments across the country were deluged with questions about the changes on employee checks. This edition of the blog should help to clear up some of the confusion regarding a couple of these changes.
The Making Work Pay Credit is gone! The implementation of this tax cut was sloppy anyway. Single folks received up to $400 of tax cuts per year factored into their withholding. Married folks received twice this amount or up to $800. There was an upper limit to allowable income. The credit itself was described in detail in a blog post almost two years ago. In the tax cut bill that Congress finally passed in mid December, the Making Work Pay credit was happily missing. That means however, that employees of nearly every income level will see their Federal Income Tax withholding increase for 2011. It’s quite a shock in the amount of increase. However, there are no more funny games to play when preparing your tax return or figuring out your W-4 values. In summary, most employees will see their Federal Income Tax Withholding line increase.
Part two of the changes to employee checks this year has to do with the Social Security component of FICA withholding. Normally, Social Security withholding is 6.2% of taxable wages up to a base. That base is $106,800 per year as it has been for 3 years now. Employers must match the 6.2% value meaning total Social Security taxes are actually 12.4% of taxable wages up to the base or up to $13243.20 per year per employee. Self employed individuals paid the entire 12.4%. This is a lot of money! The above referenced tax cut bill cut the employee portion of Social Security by 2 percentage points. Now the total is 4.2% up to the base. Employers still are required to pay their portion at 6.2%. Self-employed individuals now pay only 10.4% as well.
PaycheckCity, a site run by Symmetry Software (my day job employer), had implemented these changes and placed them on the site in late December. To my surprise, the help desk team at PaycheckCity reported that CPAs and payroll staff members were writing with questions on why the Social Security rate was different. Some even adamantly (and ignorantly) proclaimed that we were wrong and they would never use the site again. The details of the tax plan have been all over the media in the last month. Social media has trumpeted the changes as well through the many different outlets. How anyone can still be unaware of this change just baffles me. Hopefully, I have provided some knowledge to those who hadn’t heard yet, while clearing up the confusion for those who had and were surprised at the change on their check.
AUGUST 4TH, 2010
By CPA SAM
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.
JULY 14TH, 2010
By CPA SAM
Q. I have a full-time and a part-time job with different companies. My employers are both taking out Social Security tax. Is this correct?
A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit. That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.
You may ask, “What happens if the income from all my jobs add up to more than that limit? Can I get all my employers to stop withholding Social Security?” The answer is no. You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required. That is $6621.60 for 2010. You’ll see this on line 69 of the 1040 form. The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security. They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.
JANUARY 29TH, 2010
By CPA SAM
Q. I just started as a temp through an agency. I work full-time and just received my first paycheck. I want to ask about the OASDI and the NY 2010-NYCNY withholdings. I was taxed heavily for the OASDI. What is the NYCNY withholding? Most importantly, I wanted to ask you is there any way to check whether I had overpaid for taxes in a paycheck?
A. The items that came out of your check look completely appropriate. The most common questions from employees to payroll departments about paychecks come from the cryptic descriptions of deductions shown on the paystub. In your case, OASDI is the abbreviation for “Old age, survivors, and disability insurance.” This is the official name for Social Security. It is calculated as 6.2% of taxable wages up to a maximum of $106,800. This means, you can pay up to $6,621.60 this year towards this tax. Your employer(s) will also match 6.2% of your taxable wages. For lower income individuals, this tax can be the highest amount taken from the paycheck. There is another tax that is closely associated with this called Medicare. It is 1.45% of all taxable wages.
NYCNY looks like New York City Tax. All residents of New York City get to pay an extra tax. Rates on this tax range from 1.9 to 4% depending on your level of income.
As for your last question, there are only three ways to determine the correct amount of withholding. First, you download withholding formulas from each jurisdiction in which you owe tax and run hand calculations to see what is correct. Since that is time consuming and too difficult for most of us, I recommend the second method. PaycheckCity.com has a free Salary Calculator that calculates all your taxes for you using the formulas from each jurisdiction. You simply need to know what settings are on the W-4 Form you gave to the payroll department.
Most importantly, if you have specific questions about your paycheck, your payroll department should be able to assist you as long as you are not asking for tax advice.
DECEMBER 10TH, 2008
By CPA SAM
Q. I not quite 66 and married, and am ready to file for my retirement benefits with Social Security. What are some of the issues I will face? Will I be taxed on my benefits?
A. Filing for Social Security is one of those big milestones like the day your AARP packet arrives. You start to wonder how time went by so quickly. This is again one of the most frequent questions I hear. Many retirees are confused about what actually happens and the best way to manage their benefits.
The Social Security Administration has a very good chart available that explains Read more »
OCTOBER 15TH, 2008
By CPA SAM
Q. I am employed in the State of California and am curious to know what the tax limits and cutoffs are for Social Security and California SDI Payroll Taxes.
A. This question is a little more technical than I usually like to go. But there is common value and in this question and a possible tax planning opportunity available so here we go!
Social Security and Medicare are two taxes that should be withheld from every employee’s paycheck no matter who you work for. Many employees are incorrectly Read more »
JULY 9TH, 2008
By CPA SAM
Q. I am drawing Social Security and have a part-time job with my old company. They are withholding taxes from my check. Is this legal? I thought once you were on Social Security that all wages were tax free.
A. This is one of the biggest misunderstandings amongst the Read more »
