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FAQ

Do we give the same percentage of income for the Social Security tax and Medicare federal tax regardless of which state you live in?
Yes Social Security (FICA) and Medicare tax is a federal tax and the rate is the same no matter which state you live and work in.FICA tax is 6.2% of the first $128,400 (as of 2022. of wages.Medicare tax has no limit and is 1.45% of wages, plus an additional 0.9% of wages in excess of $200,000.
How much tax is taken on 350,000 dollars?
It all depends. Some sources of $350,000 are taxable; others are not. $350,000 of long term capital gains is treated differently from $350,000 of ordinary income. A total of $350,000 in one year is taxes less than an additional $350,000 on top of other income. You might reside in a state with a state income tax, and even a city with a city income tax. You might have offsetting deductions of various sorts.If you have or will be obtaining $350,000 then you can afford the services of a tax professional who can give you an exact answer, or even suggest strategies for lowering the amount of tax paid, legally.As an example scenario, suppose somebody with the median U.S. income of $59,000 is a head of household. If they take the standard deduction of $12000, their federal income tax in 2022 will be $5368.Suppose this person receives $350,000 as an inheritance. This inheritance is not taxable at the federal level, so new taxes: $0.If that same person received $350,000 as the payout of a lottery ticket, then their taxable income (after the standard deduction) is $397,000 which the tax table says would be $113,248. In this case that’s $107,880 of federal tax on the $350,000.If that $350,000 was because the person sold stock that they had held for a last year, then they owe 15% of the difference between the purchase price and $350,000. That could be up to $52,500. (Fortunately our hypothetical taxpayer does not earn enough to bump him into 20% capital gains rate.) But the net investment income tax of 3.8% will kick in on the amount above $200,000 in adjusted gross income. So that brings the tax up to $60,442 (if the stock was initially acquired for $0.)If an executive already making more than $500,000 per year gets a $350,000 bonus, then they owe 37% on the bonus as income tax, 1.45% as the employee share of Medicare taxes, and 0.9% as an additional Medicare tax for high earners. That would be $137,725 total.Surprisingly, that is not the maximum possible tax. A self-employed individual must pay both income tax and FICA taxes. This increases the tax rate by 12.4% on income below $128,400, and they have to pay 2.9% on Medicare taxes. $350,000 of self-employment income (with no offsetting deductions) would be taxed $142,911.60.
How will "Medicare-for All" be funded? The average U.S household already pays 24% in collective income taxes, increasing the tax rate wouldn't be very popular.
“How do Democrats plan to fund "Medicare-for All?" The average U.S household already pays 24% in taxes, so increasing the tax rate probably wouldn't be very popular.”I have seen a wide variety of answers that get this VERY wrong. The question itself even implies the wrong answer. Everyone seems to think that somehow this would cost EXTRA money that would be funded from some extra tax or fee.It doesn’t. We are already paying outrageous sums for health care. A single-payer system actually reduces overall costs and provides healthcare for everyone.How it Works NowFirst, let's look at how health care is funded right now. There are two main approaches; a company provided insurance policy and self-funded insurance policies.You don’t get free health care when you work for a company. They just pay you less and look at medical insurance as part of your overall compensation costs. A cost that gives the company control over you because quitting means you lose health care.Not only do these work-based policies cost the company lots of money but they also need to be administered by HR staff. None of this is free.I personally have to deal with private insurance. It cost me roughly $18,000 per year for a family of three. That is a TON of money for a crappy Silver Plan with high deductibles.Why do these two things matter? Because these costs go away with a single-payer system. That is part of the budget of money we are working with to build something better.Possible Approaches for the New WayThe funding could be done with employment taxes on companies and moderately higher taxes on individuals. There are a ton of very successful examples of this all around the world to work from. In my case, I could get a massive increase in my tax rate and STILL be better off compared to what I currently pay.Out of the largest countries in the world, the US is the only one to not have some form of national health care. Those countries all spend roughly 12% of their GDP on health care costs while covering their entire populations. The US spends over 17% of its GDP on healthcare and only covers a portion of its population.How we fund it is just a shell game. Instead of employers paying an insurance company there could be a similar payment to Universal Medicare. Their current payments to an insurance company would be replaced by payments to a single-payer health program. My payments of $18,000/year to an insurance company would instead be payments into a single-payer system.The REAL ProblemThe core problem is that our system is hugely inefficient and a waste of money. We have the ability to cover everyone at a lower cost than the system we currently have.Insurance companies make huge profits, pay executive bonuses, marketing, and salespeople's salaries. None of these things help your health but they add a huge cost to your healthcare.Hospitals have large staffs of people whose job is to try and code the procedures in a game that gets the most money from the insurance companies. Then they have other staff that fights the insurance companies to try and get paid. Insurance companies have staffs of people trying to not pay the doctors. This is all waste that does not help anyone's health.People with no insurance put off needed medical procedures until they are in a crisis. They use the emergency rooms as their only way to get help. After the procedure, they go bankrupt. The hospital spends lots of money on lawyers and staff trying to get paid. The people who needed the help get their finances destroyed, which makes it much harder to live a productive life. Many become a drag on the government in other ways after being crippled by bankruptcy. All of these expenses get built into the prices for the next hospital customer.Our system is getting terrible results and costs far more than every national health system in developed countries around the world.Think About ItEven the idea that healthcare is rationed and slow in other countries is false. Half of my family is from Europe. Whenever we have a real health problem we can normally get it dealt with faster and easier by flying there than having it dealt with in the US.We should be asking “Why are we currently paying for healthcare in this inefficient and expensive way?”If we did a TERRIBLE job of implementing single-payer healthcare and only got the costs down to 14% GDP (worst in the world), that would mean our country was spending $780 Billion less on healthcare each year and covering everyone. That is $2400 more for each person in the US.This is money we could all be spending on better things in our life than crappy insurance policies and bad healthcare. That money alone could be a nice economic boom for other parts of our economy.The fact we stick with our current system is complete insanity.
Once an American making $1 million and an American making $50K each deduct what they must spend to stay alive, under the new tax law, what do they each have left to spend as a percentage of their disposable income?
It’s a pretty complicated question for a few reasons. I am not a tax professional, and hopefully someone more knowledgeable on the subject like Andrew Weill will wade in.First - the tax bill is a federal bill, and only affects federal income taxes. Federal taxes also include Medicare and Social Security taxes, neither of which will be impacted by this bill. There are also state taxes and local taxes which can end up both having a fairly significant impact on both take-home pay as well as potentially impacting the federal tax liability.Second - most people who earn $50k/year are either getting regular employee compensation or work as an independent contractor (and depending on which, again will significantly impact take-home pay.) Whereas someone earning $1M/year is very likely getting compensated in a more complex way, with a combination of regular wages, bonuses, stock options - in addition to earnings through capital gains, maturing bonds, and dividends. Many of which can be taxed in different ways depending on a lot of different factors.Third - expenses will scale in different ways depending on income. Not everyone earning $1M/year will live in a giant house but it’s possible that they will. Some will send their kids to public school, some will send them to private school, etc. Some people earning $50k/year will have 12 maxed out credit cards, some will be meticulous about budgeting. But we can bake that into the final analysis.For the purposes of this comparison, we can make the following assumptions, even if they’re not 100% realistic:For the filers: Family of 4, with both children as dependents. Both are single-income families. Both own a home, though the value is scaled to their income. Both make mortgage payments on the home. Both have property taxes and state taxes to pay, both live in Pennsylvania, which is somewhat middle-of-the-road for each. For housing, we’ll assume that the $50k earner’s house costs $200,000 and pays a total tax rate of 1.2% of the value of the house per year, while the $1M earner’s house costs $2.4M and pays a total tax rate of 1.8% of the value of the house per year. Both put a 20% downpayment down and financed their mortgage at a 4% interest rate, and are towards the beginning of paying it.For the tax bill: because as of writing this, there isn’t a completely final bill, we’ll make the following assumptions based on the latest version[1]. 7 marginal rates; SALT deductions capped at $10,000.This answer would greatly benefit from columns to do a side-by-side comparison, but we don’t have those so we’ll have to make do.Gross Income: $50,000 / $1,000,000Social security tax: $3100 / $7960 (this only applies to income up to $128,400 in 2018)Medicare tax: $725 / $14,500Additional medicare tax[2]: $0 / $6750401k contributions (the assumption here is that the $1M earner will max this out, while the $50k earner will contribute $250/month): $3000 / $18,500State taxes[3]: $1535 / $30,700Local taxes: $2400 / $43,200 (this and the previous line will be capped at $10,000 together)Mortgage interest paid[4]: $6225 / $ 74,690 (only $38,900 is deductible)[5]Miscellaneous deductible expenses (business expenses, etc.): $650 / $4700Child tax credit: $4000 / $0 (phased out at $400,000)In figuring out how much income tax will be taken out, we’ll have to calculate the adjusted gross income (AGI) for each, which removes all possible deductions from the taxable income:If itemizing deductions: $33015 / $898,690If taking the standard deduction: $19,175 / $928,290So obviously the $50k earner will not itemize and will take the standard deduction, while the $1M earner will itemize, though the difference isn’t as big as it may have been in previous years.For the $50k earner, they’ll be paying: $1920 (for an effective rate of 3.84%) in federal income tax, but with the child tax credit added, it brings it down to $0, for an effective rate of 0%.For the $1M earner, they’ll be paying: $271894 (for an effective rate of 27.2%)This doesn’t take the alternative minimum tax into account and is based on my calculations.That answers the first part of the question. The second part asks about how much is left over. So let’s add up their expenses including taxes paid.For the $50k earner, they’re left with: $32,365. This doesn’t take into account principal paid on the mortgage. That comes to $2697/month in take-home pay for insurance, car(s), food, childcare-related expenses (though in this scenario the second parent is likely responsible for child care), clothes, miscellaneous expenses, etc.For the $1M earner, they’re left with: $527,106. Again, this doesn’t take into account principal paid on the mortgage. That comes to $43,925/month in take-home pay for everything else that’s described up there.Granted - there aren’t actually that many Americans earning $1M/year, and these calculations don’t factor in pure “disposable” income in that both earners will have more “mandatory” expenses as a result of their lifestyles and choices.Please feel free to check my math and assumptions, I’ll be happy to update based on corrections from the comments.Footnotes[1] GOP tax plan: Key details of the final bill, explained[2] What You Should Know about the Additional Medicare Tax[3] Pennsylvania Income Tax Calculator | SmartAsset.com[4] Mortgage Calculator[5] The Maximum Mortgage Tax Deduction Benefit Depends On The Ideal Income
At what point does the Founder of a startup NOT be considered "Self-Employed"?
Sure, I can address tax issues for a founder(s) and self employment. First we look at definitions on paying so called social security taxes or self employment taxes. Then, I will look at self employed founders versus wage based founders.A company paying an employee a wage pays a 6.2% social security tax and a 1.45% medicare tax. The employee pays the same. So, for wages up to the maximum amount the employer employee social security taxes and medicare taxes today 15.3%. The maximum base amount for 2022 equals $128,400. The medicare portion has no maximum so this rate continues for all wages beyond the maximum with the employer employee total continuing at 2.9% (Social Security Act Section 230). If a single person earns over $200,000 wages, the employee pays an additional 9/10 of 1% medicare tax on the excess wages. While a married individual pays the same on wages exceeding $250,000 (Treasury Regulation Section 1.401-1(d)(1).Social security taxes, medicare taxes, and the additional medicare taxes follow the exact same structure as above for a self employed individual (Treasury Regulation Section 1.401-(b)).Say, we have a founder(s) starting a service based company. The founder(s) forms a legal LLC in a particular state (using a business attorney) and uses the default tax status of disregarded entity for tax purposes or tax partnership if more than one founder (Treasury Regulation Section 301.7701-3(b)(1)(i) and (ii). Here, all the income and expense items from the founder’s LLC flow through and the items end up on his/her Schedule C 1040 individual tax return. Say, the founder has $500,000 self employment income. The founder then pays self employment tax on this income as noted in Section 1402(a). We use the following schedule discussed above: 15.3% up to $128,400; 2.9% on amounts exceeding $128,400; and 9/10 of 1% on amount exceeding $200,000 or $250,000.Say, we have a founder(s) starting a service based company. The founder forms a legal corporation in a particular state (using a business attorney). This entity uses Subchapter C of the internal revenue code. Thus, we call such entity a tax C corporation (“C”). The C pays the founder $500,000 salary. Between the founder and the C, they pay the same social security tax; medicare tax; and medicare overage tax as the founder did in the LLC case above.The situation changes if the founder does not take all the $500,000 out of the business. Say, the founder plans on leaving a portion of the profits in the business for expansion purposes. If the founder uses a C, the founder reduces the wage income which reduces the total of the above social security, medicare, and medicare overage taxes. Further, the C has a new favorable 21% tax rate on taxable income for 2022 forward (Section 11(b) revised).With the LLC, the founder leaving funds in the business still pays the full self employment taxes as noted above on all profits the LLC generates. So, in this scenario, the C strategy reduces these taxes. Further, a founder taking a salary of at least $128,400 gets full credit for future retirement social security benefits. So, no opportunity social security tax benefit cost exists here.In the scenario above, I used a service business where the founder starts the company with a smaller capital requirements. If we change the scenario: say, we have founder(s) with plenty of existing capital from a prior success. And, we have a capital intensive startup. The founder then funds the new venture with a large capital contribution. In addition, he/she will run the business starting out. So, we have a business requiring capital and services. If founder uses a LLC, the two components of his/her contribution centers on both capital and services. However, the LLC founder will pay full self employment taxes on both the capital component and the service component. As, the Internal Revenue Service recently released Chief Counsel Memo 201640014. Here, a restaurant entrepreneur funded a franchise group and also ran the operations from a LLC. The IRS required he pay full self employment taxes on both the service component and capital component.So, a C would work better for tax purposes in the capital and service operation as self employment taxes apply to founder wages only.If the founder(s) plans on using a LLC instead of C in the capital and service business, the founder may consider using a limited partnership structure instead for tax purposes. As the founder’s capital interest may represent the limited partner interest while the founder’s service component comes from a new C entity as general partner. As a limited partner interest doe not face self employment taxes (Section 1402(a)(13). Of course, a business attorney would pradvise on these entity structures for legal purposes. As I am addressing tax issues only.As a summary note, a LLC may face higher self employment taxes then you may realize in certain scenarios when dealing with higher $ situations.I have based the above tax analysis on primary tax law. If the scenarios change any, the tax results may change considerably. www.rst.tax
Is it true that self employed people pay more taxes?
US tax perspective. It is true that self employed people pay self employment tax and W2 wage workers have FICA/Medicare tax withheld from their paycheck. However that simple analysis can be very misleading if you are considering self employment vs a job as an employee.First SE tax is 15.3% of net profits from self employment. This might be working as a sole proprietor or working as a general partner in a partnership. Compare that to FICA/Med tax which is 7.65% of gross wages. You might notice that 15.3 is 7.65 times two. That is because when you work as an employee your employer also pay 7.65% of your gross wages in FICA/Med tax, so you and your employer are paying 15.3%. When you are self employed you are both employee and employer.Two important words in the previous paragraph are “gross” and “net”. If you are an employee you get paid gross wages and that is what is taxable earnings to you. When you are self employed you get to deduct necessary and ordinary business expenses to come up to net earnings and net earnings is the number a self employed person calculates tax on. As an employee if you employer does not reimburse you for business expense you can deduct those subject to limitations as an itemized deduction, but it will not reduce what your FICA/Med tax is based on and truth is you are unlikely to get much tax benefit from employee business expenses due to the limitations on how you calculate the deductible portion in your itemized deduction.So while a self employed person might pay a higher tax rate due to the SE tax, it is still possible that a self employed person pays less total tax than a W2 worker on comparable pay. Comparable pay is another important consideration, because employers factor payroll taxes and payroll compliance costs when they set pay rates. It is fairly common when you breakdown worker pay on an hourly basis, you will see a premium paid to the independent contractor over the wage worker, because the employer does not have to deal with all the hassles of payroll compliance.UPDATE: As of 2022 W2 workers can no longer deduct un-reimbursed employee business expenses when calculating taxable income. Self employed individuals still do deduct business expenses and may qualify for an additional 20% QBI deduction.
Does the U.S government really tax capital at half of what they tax labor?
As I understand it, the Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively. What changed were the ‘breakpoints• which were indexed using the new C-CPI-U factor in tax years beginning after 2018.If by labor, you mean wages and salaries, Federal statutory tax rates haven’t changed markedly (see: An official website of the United States government ) where you can make your own comparisons.However, remember that in addition to income tax withholding, wages and salaries but not capital gains are also subject to withholding for FICA (Social Security and Medicare) taxes.This means the effective tax rate (gross income/taxes paid) is much higher for wages and salaries than for capital gains. This isn’t a change.Bottom line, if by ‘labor• you mean wage/salary earnings, then yes the effective tax rate is higher than capital gains. But, the changes are minor because the basic tax law has always been like this.
In light of Walmart upping their starting wage and expanding benefits, as many other corporations have, will progressives concede that in at least this one regard President Trump did the right thing with his tax initiatives?
Wal-Mart at the same time announced plans to close 63 Sam’s Club stores and layoff approximately 10,000 employees.The decisions by Wal-Mart to increase starting pay (from $10 an hour to $11 an hour), prbonuses for some employees, and change benefits for some employees, by Wal-Mart’s own estimate, would come to less than $1 billion. Wal-Mart is getting a $2 billion tax cut.There can be a general debate about tax cuts (if you believe that they stimulate spending or not). I think it’s far more useful to look at THIS specific tax cut. It does primarily two things: it cuts taxes for very rich individuals and it cuts tax rates for corporations. And at this time, I think both are kind of stupid. Even if you think tax cuts are generally a good idea (or a bad idea), why cut taxes for corporations and the top 1%?I oppose this tax initiative for several reasons:Our economy does NOT need tax cuts right now. We’re at close to full employment. Reducing unemployment is going to be inflationary.Given the nature of the cuts (mostly to corporations and the top 1% of the population), the tendency will be to either issue bigger dividends or keep the cash on hand—both of which raise company stock values which benefit CEOs (who are almost always compensated in part with company stock). So what this means is this type of tax cut is effectively a pay increase for CEOs (b/c you increase the value of their stock holdings).The tax initiative will also serve to raise health insurance premiums and have big impacts on medicare and medicaid. Additionally, Ryan has already publicly said that to help finance this we’re going to be looking at substantial medicaid and medicare cuts in 2018.One of the assumptions of this bill is just wrong: the idea that corporate tax rates are too high. The reality is that almost every large corporation that plays in the US market space does not pay the official corporate tax rate. They utilize a series of write-offs and loopholes and exemptions. Here is one study that looked at the Fortune 500. They identified 258 of those firms that had consistently been in the Fortune 500 for 2008–2022 and profitably during all of those years (if you lost money—say in 2009—you were dropped out of the study). Here is what they found: “As a group, the 258 corporations paid an effective federal income tax rate of 21.2 percent over the eight-year period, slightly over half the statutory 35 percent tax rate. Eighteen of the corporations, including General Electric, International Paper, and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period.” So the idea that these companies are taxed at 35% is wrong. And the idea that if only they were taxed at 28% or 26%, they’d raise everyone’s wages substantially is wrong too b/c the reverse has been happening (profits going up, taxes paid not increasing or going down, wage inequity going up). What we see right now is that most corporations are seeking to stockpile cash or pay it out in dividends—either strategy raises their share value (which as I pointed out, is an indirect pay increase to the CEO).Our economy faces several issues. We have a tremendous inequity problem—tax cuts of this nature don’t address that (in fact, they make it worse). We have growing health insurance costs (and this plan makes them worse). We have infrastructure issues (and poor roads or a lack of wifi throughout a neighborhood hold business back). This tax plan addresses none of those issues and actually makes some of them worse.
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