Hello and thank you for bringing us your question.
As you know, the 2003 contribution rate, also known as the FICA tax
rate, is 7.65% for employees and 15.30% for self-employed people
[because a self-employed person pays the employer tax as well as the
employee tax]. The rates are broken out as follows:
6.2% (Social Security portion) on earnings up to the maximum taxable
amount ($87,000 in 2003)
1.45% (Medicare portion) on all earnings.
Putting your wife on the payroll of the new business will increase
your family's social security tax cost to the extent you would be over
the $87,000 limit were all the money paid to you.
1. Does the $87000 limit apply only to my salary or it includes my
wife's salary? For example, if my wife had a job, would the limit be
automatically raised to $174,000?
The $87,000 limit is calculated separately for each worker. So if
each of you are employed then each of you will pay the full FICA rate
on the first 87,000 of your pay. So if your pay is 100,000 and your
wife's is 40,000 the full tax will be payable on 87,000 + 40,000.
"Family members may operate a business together. A husband and a
wife may be partners or running a joint venture. If you operate a
business together as partners, you should each report your share of
the business profits as net earnings on separate self-employment
returns (Schedule SE), even if you file a joint income tax return. The
partners must decide the amount of net earnings each should report
(for example 50% and 50%)."
http://www.ssa.gov/pubs/10022.html#family
2. Does the answer to (1) depend on the fact that we intend to file
tax returns as "Married filing jointly"?
No--being married and/or filing jointly makes no difference. It's
an employee tax.
3. Does the $87000 limit apply to one job. For example, if I were paid
as an employee of the new business in addition to my day job, would
the limit become $174,000?
An individual gets the benefit of the $87,000 limit regardless of
how many jobs he has:
"When you have more than one job in a year, each of your employers
must withhold Social Security taxes on your wages without regard to
what the other employers may have withheld. You may then end up with
total Social Security taxes withheld that exceed the maximum. You can
claim a refund of the excess taxes that were withheld on form 1040
when you file your personal income tax return with the Internal
Revenue Service."
I can't give you a direct cite to this quote - - you'll need to go to
http://www.socialsecurity.gov/
Then use the pulldown under "Questions About", select "Taxes and
Social Security", and put in the search term "joint return" and
you'll find the question and answer
"How do I claim a refund of an overpayment of Social security taxes?"
4. Does the limit apply only to the employee portion of Social
Security tax or also to the employer portion?
"[When] the employee reaches their limitation, the employer also
reaches the limitation and no longer has to pay social security taxes
for that employee."
http://www.irs.gov/faqs/page/0,,id%3D15921,00.html
5. If the limit is shared between multiple jobs for the same person or
between husband and wife jobs, how is the limit split between the
jobs? There are two sub questions:
a. For the employee portion of the Social Security tax: Can the
employee (that is me) decide through which employer I will pay my
Social Security tax?
No. As stated in the answer to your question #3, each employer
makes full withholding based on the wages that employer is paying;
then you will apply on your Form 1040 income tax return for a refund
of the excess.
b. For the employer portion of the Social Security tax: Each employer
may think that they are the only employer and pay the full 7.65% upto
$87000 of salary. How can the employers claim the excess Social
Security tax paid? Is there any way that an employer can avoid paying
the Social Security tax in the first place, because they know that the
limit will be reached through the salary paid by another employer?
No. "Each employer must withhold and pay Social Security taxes on
the yearly wages paid to each employee up to the maximum amount taxed
for Social Security purposes, regardless of earnings paid to the
employee by other employers during the year. The employee [only] may
recover any extra amount withheld when filing a Federal income tax
return (form 1040) after the end of the year."
[to find the cite for the above quote, use the search term "employer
limit"
at http://www.socialsecurity.gov/ -- Taxes and Social Security]
Search terms used on Google:
taxable wage base "social security handbook" site:.gov
Thanks again for letting us help with your questions, and good luck
with your new venture. If you find any of the above to be unclear,
please request clarification. I would appreciate it if you would hold
off on rating my answer until I have a chance to reply.
P.S. There are benefits to including your wife on the payroll,
despite the social security tax cost, if you would like to income
tax-shelter her pay and yours with IRA or 401(k) plans. But without
IRA or 401(k) plans, your income tax may also be higher, thanks to the
"marriage tax." But those are different questions!
Sincerely
Google Answers Researcher
Richard-ga |
Request for Answer Clarification by
cwdesigns-ga
on
11 Aug 2003 09:21 PDT
Thanks for your accurate answers. Regarding the choice of legal
structure, it looks like Social Security tax is the same irrespective
of the whether the new business is operated as a sole proprietarship
or as any of the more formal legal entities.
Regarding whether my wife or I or both should be paid by the new
business, it looks like it is better for me to get paid to minimize
the social security tax for our family. (works for me :-)
Thanks also for bringing up the point about IRA or 401(K) plans. If I
really need more details on that, I guess I would have to ask another
question. However, trying to understand your hint: It looks like the
annual limit how much my wife and I can put away in our IRA and 401(K)
plans can double if she gets paid. If we choose formal legal entities
like LLC or S Corporation, I would assume that the business can deduct
the employer portion of the 401(K) as business expense. So that would
be a further tax saving in addition to increasing the annual limit, as
my day job employer does not match my 401(K) contribution.
I havent looked at what is involved in setting up a 401(k) plan in the
new business. It may be a over kill for our small business.
I didn't quite understand your comment "But without
IRA or 401(k) plans, your income tax may also be higher, thanks to the
'marriage tax.'". Do the IRA or 401(k) plans in some way lessen the
"marriage tax"?
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