Your Annual Tax Increase
February 20th, 2008
By The XBanker
If someone tries to tell you federal taxes haven’t increased for the last few years please set them straight.
Federal taxes increase every year.
Although the individual, capital gains and corporate tax rates may not have changed, the most insidious of all taxes continues its skyward march.
Payroll taxes. The money deducted for Social Security and Medicare. The money that is supposed to be set aside in a trust fund for future retirees. The money that actually gets spent by the government the minute they get it.
Payroll taxes are imposed at the rate of 7.65% on the employer and employee alike. So on a $1,000 paycheck the employee loses $76.50 and only receives $923.50. And the employer has to pay $76.50 on top of the $1,000 to the employee (and the government).
But what if you own the business and are the only employee? Then you are paying 15.3% on everything you pull out in salary. So don’t believe the apologists who say it is only 7.65%. When you own the business it is double that: a hefty 15.3% on all the salary you take up to the yearly wage base. Which is why you may want to use an S corporation to minimize your payroll taxes by taking some money out as a dividend distribution, which isn’t subject to the 15.3% tax. But that’s another post.
The point is that these payroll taxes keep going up every year because the government keeps raising the wage base. This year the 15.3% rate applies to all income up to $102,000, resulting in a tax of $15,606 per employee. On salary above $102,000 wage base, the Medicare tax of 2.65% continues to apply.
In 2009, the wage base is expected to be $106,800, up to $4,800 from this year. Or, for the owner of the business another $734.40 in extra payroll taxes. On just one employee!
The government is already estimating a wage base of $111,600 for 2010, $116,100 for 2011, and $121,500 for 2012. So in 2012, your payroll tax will be $18,589.50, up almost $3,000 in four year’s time.
Remember, these taxes are insidious because they get paid throughout the year by your bookkeeper or payroll service. You may not notice them.
But they are very real and you and your team must plan for them.
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Great post Garrett! Every entrepreneur needs to understand this topic to fully appreciate the value of incorporation. I look forward to your follow-up post.
- XB
[...] Washingtonian hoopla regarding the tax cuts over the last several years. However, there has been a silent tax increase that has far-reaching impact and has gone relatively unnoticed (my partner, Garrett Sutton, posted [...]
[...] Washingtonian hoopla regarding the tax cuts over the last several years. However, there has been a silent tax increase that has far-reaching impact and has gone relatively unnoticed (my partner, Garrett Sutton, posted [...]