PAYROLL TAXES Who is responsible for withholding and submitting our taxes for us? Are we legally required to pay taxes? In America, one of the biggest tax bites on our income is the federal income tax, though state and local taxes also take a substantial bite. There are property and sales taxes. Every time we fill up the gas tank we are paying a tax. We pay so much in taxes that some have calculated a “tax freedom day,” as the day during the year when our nation has theoretically earned the income necessary to have paid our taxes for the year. This date usually occurs in April. One hundred years ago it would have been in January. Most would answer it’s to pay for government services including national defense, roads and bridges, fire and police protection, etc. Of course, taxes are also used to pay for things with which we might not personally agree, such as wars and abortions, or on unnecessary things that many consider to be a complete waste of taxpayer dollars. Most recently, complaints and arguments were against bank and corporate bailouts. You are legally required to pay income tax. Tax law itself is codified in the Internal Revenue Code, which is known as Title 26 in the United States Code.

FEDERAL INCOME TAX The U.S. Constitution authorizes the federal government to collect various types of taxes from you. No one enjoys paying taxes, but without them, the government could not afford to provide you with the benefits and services it offers. Federal Income Taxes are based on the following: Your marital status Your income Number of exemptions you claim Transportation Infrastructure, National Defense, International Security Assistance, Benefits for Federal Retirees and Veterans, Education, Science and Medical Research, Social Service Programs (WIC, welfare, Medicaid, Head Start, etc.) What services are provided from federal income tax dollars?

SOCIAL SECURITY TAX This is a program that uses public funds to provide a degree of economic security for the public – people think of it as a form of retirement. Social Security began in 1935 when Franklin D. Roosevelt signed the Social Security Act which allowed Americans of a certain age, to receive monthly benefits from the government. This tax provides old age, disability, and survivors insurance. What is the current Social Security tax rate? Who pays Social Security tax? What is the earliest age you can start drawing on your Social Security benefits? The current social security tax rate is 6.2% on annual income up to $113,700. Both employers and employees pay 6.2% on income up to $1131,700. You can start drawing on your Social Security benefits at the age of 62. However, there are new charts showing when the suggested retirement age falls. My normal retirement age is 66. Your generation’s normal retirement age is 67. Self-employed individuals pay 12.4% in tax on social security up to $113,700. How does Social Security tax affect people who are self-employed?

MEDICARE TAX Medicare did not being until 1965. It was established to provide health care for senior citizens who are no longer able to work because they have reached the age of retirement. Medicare tax is withheld by your employer from your paycheck that helps cover the cost of running the Medicare program. Your money is put into a government trust fund, and is used as your form of health insurance upon retirement. All U.S. taxpayers contribute 1.45% to Medicare. Remember – your employer matches your contribution to Social Security and Medicare.

STATE INCOME TAX Most states levy a state income tax on your income. Vermonters shoulder the highest state and local tax burden, as a percentage of their income, than residents of any other state in the nation, according to a new report.  Why do you think that is? What is your Vermont State Income Tax based on: Your income Your marital status Number of exemptions you claim It costs more to live in Vermont – We have been ranked the smartest, most livable (environmentally) state, safest and healthiest state to live in.

ALLOWANCES? EXEMPTIONS? DEPENDENTS? People who are supported by the income of a parent, spouse, or another individual (all tax rules must be followed). Someone who is claimed as a dependent on your tax return qualifies you for a $10,000 tax credit when you file your annual taxes. A tax credit is a dollar-for-dollar reduction of the income tax you owe.  If that $10,000 would have been taxed at a rate of 25 percent, then the deduction saves you $2,500 in tax. The more allowances you wish to claim, the less income tax will be withheld from your paycheck. You can claim one allowance for yourself, one for your spouse and one for each of your dependents.

Which is the better option? OPTION A OPTION B Monthly Take Home Pay Monthly Take Home Pay $3,850 $3,860 Monthly Federal Tax Withholding = $562 Monthly Federal Tax Withholding = $478 Annual Tax Payment= Annual Tax Payment= $6744 $5736 Which is the better option?

OPTION A OPTION B Taxpayer claimed 0 exemption. Consider: More tax withheld monthly. Less monthly income for expenses. Potentially higher annual refund. Govt. has used your $$ all year. Taxpayer claimed 1 exemption. Consider: Less tax withheld – more liquid cash from paycheck to paycheck. Lower annual refund. Opportunity to save and invest money.

Withholding Allowance Certificate Purpose: Your employer can withhold the correct federal income tax from your pay. It tells them how many exemptions (withholdings) you wish to claim. You should complete a new W-4 each year and when your personal or financial situation changes. Sample W-4 Form