The IRS says about three in four Americans receive refunds each year and the average refund amount is around $2,900. That's a lot of money that you can spend, save or invest. SPEND IT WISELY If you're going to spend it, then spend it wisely. You can start by paying down expensive debt, such as credit card debt. Financial advisers universally rank getting rid of credit card debt as one of the best ways to spend your tax refund. You could alternately spend it on any kind of maintenance project—on your home or auto repairs—that would otherwise cost you even more money down the line if you put the expense on a credit card or had to dig into savings.
Chances are, the first paycheck you ever received came as a shock. It was almost certainly less than you expected. The reason for the discrepancy? Taxes. If you are an employee, your employer withholds income tax from your pay. Your pay includes not only your regular pay but other compensation such as bonuses, commissions, and vacation pay. The amount of income tax your employer withholds from your regular pay depends on the amount you earn and other information you give your employer on federal form W-4.
While policymakers obsess about the income tax, they often lose sight of an important detail: For two-thirds of households, the levy that matters most is the payroll tax. According to a new report by the Joint Committee on Taxation, the 80 million tax filers making $40,000 or less will collectively pay no federal income tax and many will even receive cash payments from the IRS in 2015. But they will pay $121 billion in Social Security and Medicare payroll taxes (including the employer share, which most economists believe falls on workers).
Understanding the Social Security tax and the Medicare tax is critical for payroll accounting. In this section we discuss the employers' portion of the Social Security tax. In addition to the amount withheld from its employees for Social Security taxes, the employer must contribute/remit an additional amount, which is an expense for the employer. In the year 2015, the employer's portion of the Social Security tax is 6.2% of the first $118,500 of an employee's annual wages and salary. For example, if an employee earns $40,000 of wages, the entire $40,000 is subject to the Social Security tax. This means that in addition to the withholding of $2,480, the employer must also pay $2,480.
Generally, employers report payroll by calculating gross monthly wage earning and then various payroll deductions to arrive at net pay. While this seems simple enough to understand, calculating various payroll deductions requires that the payroll accountant be detail oriented and work with extreme accuracy.
Closely-held corporations and their owners can seem inseparable. But this fluidity stops at Payroll’s door—in other words, when income tax withholding begins. The IRS recently issued a document called an Action on Decision (AOD) in which it said that it won’t follow a Tax Court decision that required it to honor a company’s designation of its delinquent payroll taxes as payment for a specific employee’s delinquent income taxes. Impact: An AOD means that the IRS will accept the court’s decision, but it won’t be bound by it in future cases, and it will look for and continue to assert its position in similar cases. (AOD 2014-01, IRB 2014-48)
High-earning employees will find more of their salary subject to Social Security payroll taxes starting on Jan. 1, 2015. Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (the “taxable maximum”) will increase to $118,500 from $117,000 for 2015, the Social Security Administration (SSA) announced on Oct. 22. Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum, the SSA said. Social Security and Medicare payroll withholding are collected together as the Federal Insurance Contributions Act (FICA) tax.