I despise taxes as much as the next person, but if TurboTax can simplify taxes, I believe I can too. For those aspiring to start their own businesses and hope to be bought out for $16 billion by Facebook, taxes are pivotal in understanding how much money we actually have. Here are the ones that actually pertain to us, unless you work for the Internal Revenue Service or the Federal Reserve:
Payroll Taxes: An actual misnomer, the Federal Insurance Contributions Act was created to establish Social Security and Medicare. Payroll taxes were created to provide benefits for retirees, the disabled, and children of deceased workers. The tax breaks down in several if-then cases:
Government workers in select states and full-time students (those who both study and work for a college or university) are exempt from the FICA tax.
Employed people, based on gross compensation (total compensation), must pay 6.2% (the 2013 rate) of their compensation. However, if your income is greater than the compensation limit ($113,700), only 6.7% of $113,700 needs to be paid. In other words, $7,049.40 is the cap any employed person needs to pay.
The gross compensation cap is calculated through national average gross wages and income, and rises every year. This kind of tax is called a regressive tax, which is a tax that affects lower-income families rather than higher-income families. This tax is often argued as detrimental to lower-income families because it takes a greater stake of income from the lower-income graph of the United States. Unlike standard convention, which is to tax the rich more than the poor, FICA tax is more impacting to the poor.
Corporate Income Tax: Out of the world’s developed economies, the United States holds the highest corporate tax out of the world’s developed economies. Corporate tax currently charges 35% of net income (profits). In the case of the United States, corporations, not sole proprietorships and partnerships. And with any tax, certain corporations fall under certain tax brackets. In the world of microinvestors like ourselves, this is one less tax to worry about. Unless you plan on starting a mega-corporation in the future, this tax does not pertain to us.
Individual Income Tax: Gross income, meaning taxes after taxable deductions, is taxed differently in different states and income brackets. Certain items of deduction can decrease gross income, also known as taxable income. Examples include medical expenses, home mortgage interest, charity donations, and state/local deductions. Through the Internal Revenue Service (IRS), deductibles can be obtained differently from each region.
More on deductibles to come!