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What's FICA again?
If you're a wage or salaried employee, your employer picks up half of this tax burden.
In Lesson 18
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Money 101 Lessons
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That limit rises to $97,500 for the 2007 tax year from $94,200 for the 2006 tax year.
There are no earned income limits on Medicare taxes - so even if your salary is well above the cap for Social Security tax, you will still owe Medicare tax on your total earned income.
If you're a wage or salaried employee, you pay only half the FICA bill (6.2 percent for Social Security plus 1.45 percent for Medicare), and the tax is automatically withheld.
Your employer contributes the other half.
For most people that means 7.65 percent of their paycheck is withheld and their company pays another 7.65 percent on their behalf.
If you're self-employed, however, you're expected to cough up both the employee and the employer share of FICA. You are, however, permitted to deduct half of this self-employment tax as a business expense.
If you're self-employed, anticipate having a lot of investment income, are selling property in a given tax year, or don't have enough taxes withheld from your paycheck to cover an influx of non-wage related income (e.g., alimony or rental income), there's a good chance you will need to pay estimated taxes.
They're due four times a year (April 15, June 15, Sept. 15 and Jan. 15) and are filed using IRS Form 1040-ES.
If you're a retiree, you might also consider paying estimated taxes if you make unexpected lump-sum withdrawals from your nest egg during the year or if your IRA custodian does not withhold tax on your regular withdrawals, says enrolled agent Tony Bardi.
On April 15, you have to file an annual return (Form 1040) for the previous year, and make your first estimated payment for the current year.
Figuring estimated payments can be tricky, so keep IRS Publication 505, "Tax Withholding and Estimated Tax," handy, and consult with a tax professional.
If, after taking all your deductions, exemptions, and credits, you don't think you will owe any more than $1,000 on April 15 on top of what you've already paid in taxes for the year, then you're not required to pay estimated taxes, Bardi says.
As such, if you're expecting a substantial income boost from the sale of stock or property, you may be able to avoid the complication of estimated taxes by increasing the withholdings on your W-4.
That should allow you to offset the remaining tax you'll owe at the end of the year. Likewise, if you're a shareholder in an S Corporation from which you receive a salary and distributions, then you can boost your withholding to counterbalance any taxes you'll owe on the distributions.
Even if you balk at how much you pay the federal government, at least try to minimize your aggravation by doing all you can to avoid paying penalty and interest charges.
