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Each year, the government increases the maximum social security taxes that you can pay. According to the Social Security Administration, the maximum wage base for 2004 will be $87,900, an increase of $900 from the 2003 max of $87,000. At a rate of 6.2%, the total social security taxes that your employer will withhold from your salary increases from $5,394.00 in 2003 to $5,449.80 in 2004.
In addition, every employee has Medicare taxes withheld from their pay at a rate of 1.45%. There is no limit on your wages subject to this tax.
Do You Work For More Than One Employer and Earn More Than $87,000?
For 2003, each of your employers will withhold social security taxes from the first $87,000 that you earn from them. At a rate of 6.2%, this translates into total social security taxes of $5,394.00. There are situations when you might have more than the maximum of $5,394.00 withheld during the course of the year.
Since employers are required to withhold social security taxes on the first $87,000 earned by each of their employees (this allows the government to keep the employer's matching contributions), if you work for more than one employer and earn more than $87,000 during 2003, you'll have excess social security taxes withheld. Make sure to take credit for these excess taxes on your 1040 as additional federal taxes paid in.
Let's say you work for two employers and earn $75,000 from each employer. Employer #1 will withhold $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 will also withhold $4,650 in social security taxes - for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2003 is limited to $5,394.00, the excess of $3,906.00 counts as additional federal income taxes paid in by you.
Calculating the self-employment tax:
Self-employed individuals are subject to social security and Medicare taxes as well. These two taxes are reported as part of an additional tax known as the "self-employment tax". Self-employment taxes are calculated on a Schedule SE and are reported as an additional tax on page 2 of the Form 1040.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees since a self-employed person must pay both the employee's portion and the employer's portion of both taxes.
If you earn income as an employee and as an independent contractor, and your combined income exceeds $87,000 in 2003, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and too much self-employment taxes will be remitted.
A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at www.ssa.gov.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2004 wage base max: $87,900
What's the easiest way to keep off the IRS' radar screen? By always filing your personal and business tax returns when due. Even if you don't have the funds to pay all of the taxes that you owe, filing the returns by their due date is a must.
Potentially, you will be involved with as many as four types of tax returns, with each having different filing and payment requirements. Let's take a look at the various types of tax returns, and some of the problems that can result if you don't comply with the regulations.
Most everyone is aware that the 1040 is the form number of the personal income tax return. On this return, you report your W-2 income if you're an employee, your net self-employment income if you're a sole proprietor, or your profit distribution if you're part of a partnership, limited liability company or S corporation.
As an employee, your W-2 also reflects the income taxes you had withheld during the year, which you'll report on your return as well. If you're self-employed or part of one of the other entities mentioned above, you generally need to pay in your taxes by making quarterly estimated tax payments. If required, it's important to make these quarterly payments on time. Otherwise, you could end up being hit with an underpayment penalty by the IRS.
Your tax return is generally due April 15th each year. Even though you can automatically extend the due date of your return to August 15th simply by filing a Form 4868 with the IRS, you are still required to pay any taxes due by April 15th. The extension only buys you more time to file your tax return. It doesn't extend the due date for paying your taxes.
Failure to make an adequate payment with the extension request could cause the return to be considered filed late, which might result in your being assessed late payment penalties and late filing penalties. While the late payment penalty is 0.5% per month on the balance due (in addition to any interest you will owe), the late filing penalty is a whopping 5% per month for the first five months the return is filed late - up to a maximum of 25% of the balance due as reflected on your tax return.
You can choose to run your business as one of four types of tax entities. Each has different filing requirements as follows:
The due date for filing a corporate tax return is two and a half months after the corporation's year end - which is March 15th for a calendar year business. All other tax returns, including the 1065, are generally due April 15th.
Even though the Form 1065 is an information return which almost never has a tax due, it must still be filed on time every year. If not, the IRS might penalize the partnership for every day that the form is late. The same holds true for an 1120S, which rarely has taxes due with the return. A Form 1120 may have taxes due if there is a profit, and the late filing penalty is the same 5% per month as explained above.
Payroll Tax Returns
If you have employees (including yourself if you're an employee of your own corporation), you're required to withhold social security and Medicare taxes from the salaries paid. And as the employer, you need to match these taxes withheld. Plus, you will most likely withhold federal income taxes on behalf of each of your employees.
Periodically, you need to remit those taxes to the IRS either by depositing the taxes due with your bank, or by paying them via the telephone through the IRS' electronic funds transfer program (ETFPS).
The frequency that you need to remit these deposits is determined by the total amount of tax deposits you made during the prior year. Failure to remit these taxes on time could lead to potentially large penalties. If you're just one day late, the penalty is 2% of the taxes due, and then quickly jumps to 5% if you're 6 days late. And if you're more than 16 days late, you should expect to pay a 10% penalty to the IRS.
Plus, if you neglect to deposit the payroll taxes that are due, the IRS will assess a "trust fund penalty" against the person, or persons, responsible for paying the tax. That means they will attempt to collect the unpaid taxes directly from you. You never want this to happen to you.
Retirement Plan Returns
Believe it or not, you even need to file an annual tax return for your retirement plan, unless certain exceptions are met. And even though there are no payments due with these tax returns, you want to make sure that your plan is always current with the IRS filing requirements since there is a penalty for each day the return is filed late.
It's also important to comply with your plan provisions regarding eligibility, vesting and making contributions. Failure to do so could cause the plan to be disqualified.
Following these simple rules will help keep you off the IRS radar screen. Not complying could cause tax liens to be filed, wages garnished, bank accounts seized, ruined credit and many sleepless nights.
Charles K. Montecino is a Certified Public Accountant located in Pitman, New Jersey. In the last thirty years he has helped countless numbers of taxpayers that found themselves on the IRS radar screen for not complying with various IRS regulations. More importantly, he has helped even more people from getting on the IRS' radar screen. You can find more information at www.montecinocpa.com or www.taxproblemssolved.com.
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