We all know that hot air makes a hot-air balloon rise. Well, the hot air coming out of Washington sure makes payroll taxes rise. Maybe someone should remind our Senators and Representatives in Congress that payroll taxes cost money too. Big money. Read what follows and weep.
The news for 2005 is the same and sorry old story: Social Security taxes are in the stratosphere. Way beyond the pull of logic, reason and gravity. An outrageous and costly burden. Your take-home pay will be lower in 2005.
First the basic rules. Social Security taxes are imposed not only on employees and employers, but on self-employed individuals as well. The FICA (commonly called "Social Security") rate on employers is 7.65%; the same rate applies to employees; and the self-employment rate is a whopping 15.3%.
The total 7.65% for FICA taxes actually has two components: 6.2% is Social Security tax and 1.45% is the Medicare hospital insurance tax (MHIT). The equivalent figures for self-employment tax are 12.4% for Social Security and 2.9% for MHIT (total of 15.3%).
The Social Security tax is based on the amount of your salary or earned income (if you are self-employed). The ceiling amount is adjusted annually for inflation. Here's the bad news: The ceiling was $87,900 for 2004. The ceiling balloons by $2,100 for 2005 to $90,000. Unfortunately there is no ceiling on the MHIT. (Terrible law!)
Now, let's crunch the numbers for 2005, using the new $90,000 Social Security tax ceiling and determine the exact horrendous cost to the employer for an employee (call him Ed). Suppose Ed earns $100,000. Here's how you compute the expensive tax result:
$90,000 x 6.2% = $5,580
$100,000 x 1.45% = $1,450
Total Cost = $7,030
Remember, Ed gets hit for the same amount. Let's see, that's $7,030 each (for the employer and Ed), or a total of $14,060 for both. Truly a tax travesty! Compare that to the total top cost of $2,808 in 1979, and you might want to cry… "FOUL!"… Will it ever stop? And don't forget, the MHIT (I call it the "maximum hit") of 2.9% (1.45% times 2) never stops. For example, dare to earn $1 million: Then you must cough up $29,000 just for MHIT. No question about it… a tax robbery.
Are you self-employed? The results are even worse. Why? You, and you alone, must bear the entire payroll tax burden. For example, the tax for a self-employed business owner (not incorporated) earning $100,000 is the same as for Ed and his employer combined: money-or-your-life amount of $14,060. Hallelujah… the tax law gives you one break: You can deduct one-half of the Self-Employment tax. (Tell your professional to see Section 164(f) of the Internal Revenue Code).
Payroll taxes are so burdensome that we are constantly looking for legal tax tricks to reduce the pain of these onerous taxes. For advice on these tricks, contact Irv Blackman.