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MONTHLY TAX NEWSLETTERNovember 2011
first time in three years, the government has increased the maximum social security taxes
that you can pay. For 2012, the maximum wage base jumps to
$110,100, an increase of $3,300, or 3.1%, over the max of
$106,800 that was in place from 2009 through 2011.
As an interesting side note (and sad commentary about the current state of the economy), here is what we wrote back in November 2008 in an article about the 2009 increase to social security taxes: The Social Security Administration predicts that 11 million individuals will end up paying higher taxes due to this increase, out of the estimated 164 million workers who will pay social security taxes next year. Basically, the government projects that there are now one million less individuals who will be at the Social Security max and three million less workers paying into the system than there were just three years ago.
At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary is $6,826. This is $2,341 higher than the 2011 max of $4,485. Remember, the rate for the employee portion of the Social Security tax was reduced to 4.2% for 2011 only. Not only will high-income individuals pay Social Security taxes on an extra $3,300 in 2012, they, like all workers paying into the system, will also do so at a higher rate.
Calculating the Self-employment Tax:
If you're self-employed and earn more than $400 in net profit from your business, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your 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. Remember, when you work as an employee, your employer matches the social security and Medicare taxes withheld from your pay.
Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes. If you earn income as an employee and as an independent contractor, and your combined income exceeds $106,800 in 2011, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.
Do You Work For More Than One Employer in 2011 and Earn More Than $106,800?
For 2011, each of your employers withholds social security taxes from the first $106,800 that you earn from them. If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a 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 withholds $3,150 in social security taxes ($75,000 * 4.2%). Employer #2 also withholds $3,150 in social security taxes - for a total of $6,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2011 is limited to $4,486, the excess of $1,814 counts as additional federal income taxes paid in by you.
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:
2012 wage base max:
by Lisa DiOrio
Statistics show that 68% of customers who leave a business do so due to perceived indifference. Frankly, they don't think anyone at the business will notice or care if they go somewhere else.
These statistics apply to healthcare professionals as well. Does your practice have a system in place to periodically connect with your patients? With Send Out Cards, you can easily and cost effectively implement a relationship marketing campaign by sending out a physical greeting card with a genuine heartfelt message that includes your own handwriting and signature. You can even personalize the cards you send with pictures and business logos, and can also add a gift or gift card to be sent along with the card.
I'd like to share these testimonials from other healthcare professionals I work with:
Dr. Phil M., Southbury, CT:
Send Out Cards has provided a tremendous service to my medical practice. It has given me a simple mechanism to reach out to my patient population to wish them happy birthday, happy anniversary, or simply to recognize an important event in their life. The response has been overwhelmingly positive and it has allowed me to foster a more personal relationship with my patients.
E Dental, Westford, MA:
In our office, we use Send Out Cards for a "thank you for a referral" to patients. If a patient refers more than one person in a month, we send brownies too through Send Out Cards. We also use Send Out Cards to send a sympathy card or a congratulations on a new baby. If we see a patient's name in the paper or on Patch.com, we'll send a congratulations card to acknowledge the student's academic or athletic accomplishment.
We use Send Out Cards for anything we would normally send a card for. The beauty of it is that it is immediate so we don't have to run out an pick up a card or allow too much time to pass before sending out a card.
Contributing to a retirement plan is one of the best tax shelters available to you during your working years. Recently, the IRS announced that many of the retirement savings limits will increase for 2012.
Employer Sponsored Plans
Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. For 2012, you can contribute up to $17,000 into a 401(k) or 403(b) plan through salary deferrals, up from $16,500 in 2011.
Looking to set your 2012 monthly budget? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,416.66 per month from your pay.
Catch-up contributions remained the same as they were in 2011. Anyone 50 or older by December 31, 2012 can contribute an extra $5,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $22,500, or $1,875.00 per month.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals. For 2012, the maximum contribution into your SIMPLE remains at $11,500. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2012, for a total annual contribution of $14,000, unchanged from 2011.
Are you self-employed? Each year, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution for 2012 is $50,000, or $4,166.66 per month, up from $49,000 in 2011.
Solo 401(k)'s are an attractive alternative to many sole proprietors and business owners with no full time employees who work more than 1,000 hours per year besides a spouse. If you don't have access to a 401(k) or 403(b) plan through another employer, the Solo 401(k) plan makes it easier for you to hit next year's max of $50,000. If you're 50 or older, your maximum contribution into a Solo 401(k) jumps to $55,500, or $4,625.00 per month. You have until December 31st to set up a Solo 401k for 2011.
The IRS also announced that the maximum amount of wages and net self-employment income that you can use to determine certain retirement plan contributions has increased to $250,000 for 2012, up from $245,000 in 2011.
Don't forget about IRA's. Even if you're covered under a retirement plan at work, you and your spouse can each contribute up to $5,000, or $416.67 per month, into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $6,000, or $500 per month.
While the maximum contribution to an IRA did not increase for 2012, there is some good news for people looking to contribute to a Roth IRA . The amount you can earn and still contribute to a Roth has increased by $4,000 for married couples and by $3,000 for single individuals, as follows:
If your income is too high for a Roth, don't forget that the rules changed a few years back, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts. For more information, please check out the article, The Re-Emergence of Non-Deductible IRAs, available on our March 2007 Newsletter or Keep on Converting in 2011 and Beyond, available in our March 2011 Newsletter.
And if you're married and your spouse isn't covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $173,000 - $183,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2012 Budget
Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2011 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2012.
2012 Maximum Retirement Account Contributions
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