You may notice several deductions on your paycheck, such as federal income tax, state taxes, and Social Security. The Federal Insurance Contributions Act (FICA) tax is a critical component of these deductions. While the FICA tax may appear complex at first, understanding its purpose and ramifications can help you make sound financial decisions. This blog post will go into detail on the FICA tax, its components, and how it affects your salary.
What is FICA Tax?
The FICA tax is a mandatory payroll tax that is deducted from the earnings of American workers. It is an abbreviation for the Federal Insurance Contributions Act, which was passed in 1935 in order to provide social welfare programs such as Social Security and Medicare. The major purpose of the FICA tax is to provide financial stability for retired and disabled people as well as healthcare benefits to eligible residents. Most employees have a total of 15.3% deducted from their paychecks for FICA tax. However, they are only responsible for paying half, while their employers are responsible for the other half.
Social Security
The Social Security tax accounts for the majority of the FICA tax. It is 12.4% of your wages, half paid by you and half paid by your employer. The Social Security program, which pays retirement, disability, and survivor benefits, is funded by this tax. It is crucial to note, however, that the Social Security tax has an income cap. You no longer pay Social Security tax for that year if your wages surpass the cap. In 2023, FICA tax is only collected on the first $160,200 of earnings but this figure may change annually.
Medicare
The Medicare tax, which amounts to 2.9% of your income, half paid by you and the other half paid by your employer, is the smallest element of the FICA tax. This tax supports the Medicare program, which provides vital healthcare benefits to people 65 and older, as well as certain disabled people. Unlike the Social Security tax, there is no income limit for the Medicare tax. In other words, all of your wages are taxed.
An additional 0.9% Medicare tax is placed on incomes above a particular level for high-income individuals. This threshold is set at $200,000 for single filers and $250,000 for married couples filing jointly in 2023. This Medicare tax is intended to help pay for the Affordable Care Act and the Medicare program. Employers are not required to pay this tax.
Exemptions
These rules apply to the majority of workers but there are some exceptions. For example, self-employed individuals are responsible for paying the full 15.3% FICA tax since they do not have an employer to split the cost. On the other hand, there are a few groups that are exempt from paying the tax altogether. This includes college students who work on the campus in which they study, some nonimmigrants and nonresident aliens, and some religious groups. However, it’s important to note that opting out of this tax also means opting out of receiving Social Security and Medicare benefits.
How to Calculate FICA Tax
As mentioned earlier, you are only responsible for half the required 15.3% FICA tax, or 7.65%. To find out how much you will pay in FICA taxes per year, you can multiply your gross income (up to $160,200 in 2023) by 7.65%. If you are self-employed, you should multiply your gross income (up to $160,200 in 2023) by 15.3%. Keep in mind that you may need to add in the additional 0.9% if you are a high earner. In any case, you should always be mindful of how much taxes you are paying throughout the year in order to avoid a surprise tax bill during tax season. Things like switching jobs or working multiples jobs at a time can result in overpaying or underpaying FICA tax. Optima Tax Relief has over a decade of experience helping taxpayers with all kinds of tax situations.
Tax deductions can drastically reduce your total tax liability and allow you to save money. While medical bills can be a significant hardship for many individuals and families, it is critical to understand that certain medical expenses are tax deductible. Understanding the eligibility criteria and documentation requirements will help you in optimizing your deductions and possibly lowering your tax payment. In this post, we will look at medical expenses that are tax deductible.
Tax Deductible Medical Expenses
You might be surprised to hear that the IRS lists over 80 medical expenses that you can deduct from your taxes. While the full list of eligible expenses can be found on IRS Publication 502, some common expenses include:
Acupuncture
Ambulance services
Braille reading materials
Costs incurred to accommodate your home to a disabled condition
Costs incurred to install special equipment in your vehicle that accommodates a disabled condition
Chiropractor
Contact lenses
Dental treatment
Eye exams
Fertility treatment
Hearing aids
Lab fees
Medicines
Nursing home expenses
Physical exams
Psychiatric care
Transplants
X-rays
Medical Expenses That Are Not Tax Deductible
You should always be aware of the medical expenses you may not deduct during tax time including but not limited to:
Cosmetic surgery (some limitations apply)
Funeral expenses
Future medical care
Maternity clothes
Nonprescription drugs and medicines
Nutritional supplements
How to Claim Medical Expense Deductions
In order to deduct medical expenses on your tax return, you will need to itemize your deductions. That being said, it is really only worth doing if your medical expenses exceed the standard deduction. The 2023 standard deduction is $13,850 for a single filer and those who are married but filing separately, $27,700 for married couples filing jointly, and $20,800 for heads of households. These figures are set to increase for tax year 2024 to the following:
Single Filers, Married Couples Filing Separately: $14,600
Married Couples Filing Jointly: $29,200
Heads of Households: $21,900
If it seems itemizing your deductions would save you money than taking the standard deduction, you can deduct your qualified medical expenses using Schedule A. Keep in mind that you may only deduct unreimbursed medical expenses paid during the year previous. In addition, you can only deduct expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $45,000, then the first $3,375 (7.5% of $45,000) of qualified medical expenses cannot be deducted. Anything that exceeds $3,375 can be deducted. Assuming you had $10,000 of unreimbursed medical expenses for the year, you would be allowed to deduct $6,625 of it on your tax return.
If you do decide to deduct medical expenses during tax time, be sure to keep adequate records of your expenses during the year. Keep receipts, invoices, statements, and any other relevant documentation that validate your medical expenses. Not doing so can result in financial loss, risk of audits, and dealing with the IRS. If the IRS has reached out to you about your tax situation, we can help. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
With all the talk of the new electric vehicle (EV) tax credits, it’s a good time to remind you that you can also claim tax credits by making some energy efficient upgrades to your home. The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are up for grabs if you recently made qualified updates to your home that help conserve energy. Here’s a breakdown of two home energy tax credits, who qualifies for them, and how to claim them.
Energy Efficient Home Improvement Credit
Beginning in 2023, taxpayers can claim up to $3,200 in improvements made during the year. Specifically, this is thanks to the Inflation Reduction Act. Improvements made to upgrade energy efficiency are qualified expenses, including:
Exterior doors, windows, skylights
Insulation
Central air conditioners
Water heaters
Furnaces and hot water boilers
Heat pumps
Biomass stoves and boilers
Home energy audits of a primary residence
Renters and homeowners of primary residences and second homes may also claim the tax credit as long as the property is used as a residence. Conversely, landlords cannot claim the tax credit. The residence must be existing or for an addition or renovation to an existing home. Qualified taxpayers may claim up to $1,200 for energy property costs and some home improvements that upgrade energy efficiency. In addition, upto $2,000 may be claimed per year for qualified heat pumps, biomass stoves or biomass boilers. This tax credit may not be carried to future tax years and is nonrefundable. In other words, your savings cannot exceed the amount of tax you owe.
Residential Clean Energy Credit
The Residential Clean Energy Credit can be claimed for 30% of the expenses of new, qualified clean energy improvements in your home, as long is it was installed between 2022 and 2033. Basically, these qualified expenses include:
Solar electric panels
Solar water heaters (must be certified by the Solar Rating Certification Corporation or comparable organization)
Geothermal heat pumps (must meet Energy Star requirements)
Wind turbines
Fuel cells
Battery storage technology (must have capacity of at least 3 kilowatt hours)
You may claim this tax credit if the upgrades were made to an existing home or to a newly constructed home. However, the credit must be claimed in the tax year that the improvements were installed and not just purchased. This credit is nonrefundable, meaning your savings cannot exceed the amount of tax you owe. Additionally, there is no annual or lifetime limit on the amount credited to you, except for improvements made to fuel cells, as this provision will begin to phase out in 2033. Some of the expenses listed above only qualify if the home is used as your primary residence. Lastly, you should confirm with a qualified tax preparer about the limitations of this credit.
How to Claim the Energy Efficient Home Improvement and Residential Clean Energy Credits
Both green tax credits can be claimed using IRS Tax Form 5695, Residential Energy Credits. Part I allows you to claim the Residential Clean Energy Credit while Part II of the form allows you to claim the Energy Efficient home Improvement Credit. The most important thing when claiming any tax credit is to confirm you are eligible to claim it. Once you confirm your eligibility, be prepared to keep adequate records of any purchases and expenditures to substantiate your claim. Claiming a tax credit that you are not eligible for can result in receiving an IRS notice. If you have received an IRS notice, Optima Tax Relief can help.
Payroll fraud is an unfortunate reality that continues to haunt businesses, causing significant financial losses and harming their reputation. This fraudulent act occurs when an individual manipulates the payroll system to get money or benefits to which they are not entitled. Payroll fraud can threaten any company, from small firms to large multinational corporations. Here’s an overview of what payroll fraud is and how to avoid it.
What is payroll fraud?
Payroll fraud includes a wide range of fraudulent actions, such as ghost employees, faked overtime claims, unlawful salary rises, commission manipulation, and unauthorized perks. Employees, management, or even outside parties who exploit payroll process flaws can be liable. Here are some of the most common types of payroll fraud.
Ghost Employees: A ghost employee is someone who is added to your payroll in order to collect a salary even though they are not employed by your organization. While this can be done accidentally, more often than not it’s done fraudulently to collect a paycheck for a nonexistent employee.
Timesheet and Overtime Fraud: Another prevalent type of payroll fraud is inflating hours worked or claiming overtime when it is not due. Employees that are dishonest may conspire with superiors or coworkers to alter time records, resulting in excessive payouts.
Wage Manipulation: Unauthorized raises, bonuses, or commissions can be exploited by dishonest personnel with payroll system access. They fraudulently raise their own pay by changing salary figures.
Misclassifying Employees: Employers are required by the IRS to correctly classify their personnel. Some employers illegally categorize W-2 employees as 1099 employees in order to avoid paying taxes or providing health care coverage.
Expense Fraud: In some cases, employees may be authorized to be reimbursed for expenses, and take advantage. Inflated, false, duplicate or personal reimbursement claims all contribute to payroll fraud.
How do I avoid payroll fraud?
Payroll fraud is difficult to eliminate entirely. This is because sometimes it occurs unintentionally. However, with strict policies, it can be limited and detected early. Some ways to avoid payroll fraud include:
Having strict internal controls: Payroll is not an area in the company in which many people should have a hand in. While there should be multiple personnel involved in the payroll process, their roles and duties should be clearly defined and audited on a regular basis to ensure a healthy checks and balances system.
Having regular and surprise audits: Audit payroll records on a regular basis to identify any inconsistencies or discrepancies. Inconsistencies, such as duplicate entries, unapproved changes or excessive overtime claims, should be prevented.
Using a modernized payroll system: Use current payroll software that has fraud detection tools. Advanced systems can detect unusual trends, duplicate entries, or abrupt changes in employee data, providing useful insights for further research.
Hiring trustworthy employees: When employing new personnel, do extensive background checks and verification procedures. Confirm their identification, job history, and qualifications to lessen the risk of recruiting individuals who have a history of fraud.
Payroll fraud is a major source of fraud within companies. In fact, most financial loss in organizations comes from within rather than from outside third parties. If you have a business, it’s important to avoid payroll fraud at all costs, as it can result in financial hardship as well as punishment by the IRS. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations, whether they are individuals or businesses.
The Inflation Reduction Act of 2022 has equipped the IRS with more than $80 billion in funding. That means more audits and more enforcement. CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what you can expect from the IRS moving forward and how you can resolve your tax burden.
