Yesterday, we complained about owing taxes--not paying taxes, mind you: owing them. We expressed befuddlement at the government's apparent inability to simply withhold the proper amount throughout the year, thus sparing us the discomfort of having to fork over a large lump sum at one perhaps inopportune moment. We were then taken to task by the Research Department for not being a "math person." We freely acknowledged this (despite the fact that we have often supplemented our income as a math tutor--but that's another story for another day), but pointed out that, to us, this is really not a math issue so much as an administrative one. The Research Department then explained that a math person would keep track of where s/he stood taxwise throughout the year and plan accordingly. We reiterate: This is an administrative issue. Sure, we could keep track of where we stood all throughout the year--math person or not--but why should we have to? Why can't the government's financial wizards--math people all, presumably--simply do the calculations and withhold accordingly?
(It should be noted that the Research Department has a somewhat libertarian bent, so we are expecting some extended commentary on the wisdom of entrusting one's personal financial well-being to the ministrations of governmental functionaries. Brace yourselves, folks!)
We also saw a headline yesterday about the Obamas' tax bill. They earned something like $5.8 million dollars last year and donated about a third of that amount to charitable causes.
Speaking of presidential income, what do you think of the fact that the President of the United States' salary is $400,000 a year. No trifling sum, to be sure--we would take it. Then again, when you consider that C. C. Sabathia makes about $500,000 per game for the Yankees, $400 grand for leading the free world seems like a relative bargain.
More interesting was the breakdown of the salary. Here, in a Solipsistic exclusive, we present a line item breakdown of the President and Mrs. Obama's income:
Nobel Peace Prize $1.3 million
Dividends $2 million
Royalties $2 million
Wages $400,000
Part-time job at Wal-Mart (evening shift) $100,000 (Really!)
Birthday check from Michelle's Mom to Barack $20
The Research Dept will attempt to explain to you why you must perform this 'administrative' task, and not the govt, due to feasibility.
ReplyDeletePayroll Accounting is one of the most confusing areas of clerical accounting and takes awhile to teach and absorb. We are focusing on payroll deductions, specifically Federal and State Withholding.
Your Employer is responsible for calculating and deducting income tax withholdings from your paycheck, submitting these tax payment to the government, and accounting for them. Upon employment, you fill out a W-2 Form. From the deductions number and marital status you list on your W-2, your employer takes your gross taxable pay FROM THE CURRENT PAY PERIOD and your W-2 deductions number and status and looks up, ON A TABLE, how much to withhold from your CURRENT PAYCHECK.
So, for example, if your gross taxable income for a given bi-weekly pay period is $1,000, for the sake of argument you might have Federal Withholding of $150. If then, in another bi-weekly pay period your gross taxable income is $2,000, you might have Federal Withholding of $500 because an extrapolated yearly income of $52,000 is in a higher tax bracket than an extrapolated yearly income of $26,000.
You see, withholding is calculated separately for each pay period.
Here are some of the reasons why you might owe more to the Federal Govt, for example, than was withheld from your paychecks:
(1) The taxable income in your pay periods was not constant. (2) You selected too many deductions or put the wrong status on your W-2 (3) When you combined your income with your spouses income on your tax return, the resultant income caused you to owe more taxes (4) You had income in which taxes were not withheld, such as interest income, a cashing in of an IRA, income from a business, or capital gains, for example.
You see, neither the government nor your employer knows how much your spouse earns or how much withholding her employer withheld. They don't know if you have other income.
Your employer does not recalculate your 'proper' withholding at the end of the year. That reconciliation is left to you. Even if your only reported income comes from your employer, it would be a nightmare for your employer to try to 'True Up' your 'proper' withholding, collect it, submit it to the govt, and account for it.
This 'administrative' task is yours to perform. If you don't want to owe taxes at yearend, fill out another W-2 and list fewer deductions.
Famous true (well, maybe apochryphal) story. Lou Gehrig meets FDR in 1933 (or so). They get to talking salary and Roosevelt remarks that Gehrig's is considerably more than his. Gehrig replies: "But, don't forget, I had a much better year than you!"
ReplyDelete@Anonymous: We heard it was Babe Ruth, but the point is well taken.
ReplyDelete@Susan: As always, we appreciate the Research Department's time and clarity. We thank her for her cogent explanation and feel only slightly smug as we point out that you fill out a W-4 when you start working and receive a W-2 at tax time. (Hey, we need to get out moments of smug superiority where we can!)
You are correct, Solipsist! I stand corrected, W-4.
ReplyDelete