Frequently Asked Questions Faqs
You may be wondering how far you can go with an accounting degree. Or the difference between an accountant and a CPA. Get honest, realistic answers to the most commonly asked questions.
What is accounting and why is it important? Accounting is often called the “language of business” because it deals with interpreting and communicating information about a company’s operations and finances.
Accounting is extremely important to any company because the financial information, as interpreted by CPAs, allows executives to make informed business decisions-decisions that help those companies become more successful.
Economic events are measured and described by accounting. Everyone works with and uses accounting ideas, whether they’re managing a business, investing money, or just deciding how to spend their paycheck.
In business, accounting links the past with the future. It provides decision-makers information about recent financial activity, as well as information and recommendations useful for forecasting future events.
Are CPAs and accountants the same thing? Yes and no. All CPAs are accountants, but not all accountants are Certified Public Accountants . The principal differences between accountants and CPAs are education, experience, and opportunity. Becoming a CPA is a challenging goal, but one very much within your reach.
Recent Trends In The Incidence Of Taxation
Taxes affect market prices, so the statutory burden of a tax does not describe who really bears the tax
Taxes affect economic interactions by changing the relative prices of goods and services in the economy. This implies that, to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. For example, if a tax is imposed on producers, in a competitive market they will raise prices to some extent to offset this tax burden so the producers income will not fall by the full amount of the tax. A similar argument can be made if the tax is levied on consumers, since in a market economy the tax will lower demand, and this will have a consequence also for producers.
The key point is that, in order to analyze the economic incidence of taxation in a market economy, we need to look beyond statutory tax rates. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation.
How much taxes do rich households pay in the US?
In the US, the Congressional Budget Office produces estimates of the incidence of taxation across the population. To do this, they make the following assumptions: Taxes on earnings are borne by workers Taxes on individual income are borne by the households that pay them Taxes on corporate income are borne by individuals in proportion to their capital income Taxes on consumption are borne by individuals in proportion to their consumption.16
Inelastic Supply Elastic Demand
If a producer is inelastic, he will produce the same quantity no matter what the price. If the consumer is elastic, the consumer is very sensitive to price. A small increase in price leads to a large drop in the quantity demanded.
Tax: Inelastic supply and elastic demand: In a scenario with inelastic supply and elastic demand, the tax burden falls disproportionately on suppliers.
The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax. Because the consumer is elastic, the quantity change is significant. Because the producer is inelastic, the price does not change much. The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer. In this example, the tax is collected from the producer and the producer bears the tax burden.
Also Check: Cerebral Hemorrhage Prognosis
What Is The Social Security Payroll Tax
The portion of FICA taxes that is dedicated to Social Security is used to fund the Old-Age and Survivors Insurance and Disability Insurance programs, which provide income on a monthly basis to retirees, people with disabilities, and their families. Payroll taxes are the primary source of funding for those programs, accounting for 88 percent of all inflows into their trust funds in 2019.
Employers and employees each pay 7.65 percent of payroll in FICA taxes the portion dedicated to Social Security is 6.2 percent and is only levied up to a maximum income level determined annually . Self-employed individuals also contribute to these funds through Self-Employment Contributions Act taxes. The rates for SECA taxes are identical to those for FICA taxes, with the only difference being that the individual is responsible for paying both employee and employer portions of the tax.
In 2019, Social Security received $914 billion in revenue from payroll taxes, or 4.3 percent of gross domestic product . The remainder of the programs inflows come from taxation on Social Security benefits as well as interest on the balances of the trust funds.
Competing Goals For A Tax System
Most people believe taxes should be fair, conducive to economic prosperity, and enforceable, as well as simple. But even people who agree on these goals often disagree about the relative importance of each. As a result, policies usually represent a balance among competing goals, and simplicity often loses out to other priorities.
For example, most countries tailor tax burdens to individual taxpayers characteristics. That can make taxes fairer, but more complex. Income has to be traced from businesses to individuals. Individual characteristics such as marital status and number of dependents, as well as the composition of expenditures or income, have to be reported and documented. These conflicting objectives appear to be especially relevant in the current tax code, where the desire to reduce tax burdens for particular groups have added significant complexity.
Recommended Reading: How Do Brain Freezes Happen
Why Do We Need A Flat Tax
The flat tax could boost saving by raising the after-tax return on saving and by shifting income toward high-saving households. Estimates suggest shifting from a pure income tax to a pure flat tax would raise long-term saving by between 10% and 20%, thus raising the saving rate by a half percent to 1% of GDP.
Do You Need To Keep Records Of Payroll Taxes Withheld
Yes, its a good idea to keep copies of all the tax documents you process. Youll likely need them when its time to file taxes. Its also good to have them on hand in case a dispute about withholdings arises with employees. You can also use them to prove youve fulfilled your liability as a taxpayer.
A few of the documents that you should keep on hand include:
- Employee Forms W-4 and Forms W-2
- Forms 941 or 944
- State tax forms
Recommended Reading: Does Brain Freeze Cause Damage
The Consequences Of Taxation
Taxation is an important instrument to reduce inequality
One way to gauge the extent to which taxation redistributes resources between individuals in a country, is by looking at how the distributions of incomes change before and after taxes. The visualization does this, showing the reduction of inequality that different OECD countries achieve through taxes and transfers.
The estimates correspond to the percentage point reduction in inequality, as measured by changes in the Gini coefficients of income, before and after taxes and transfers. The source for the data is the 2016 OECD Inequality Update as part of the OECD Income Distribution Database . The IDD provides further details regarding how these estimates are constructed. In a nutshell, income before taxes corresponds to what is usually known as market income while income after taxes and transfers corresponds to disposable income .
The data shows that across the 35 countries covered, taxes and transfers lower income inequality by around one-third on average . Yet cross-country differences are substantial, with declines ranging from about 40% in Denmark and Ireland, to about 8% in South Korea. The US a country with high baseline levels of inequality achieves a reduction of around 17%, which is a little over half of the OECD average.
Generally speaking, countries that achieve the largest redistribution through taxes and transfers tend to be those with the lowest after-tax inequality.
How Do Payroll Taxes Work In Other Countries
Many countries in the Organisation for Economic Co-operation and Development , a group of nations with high-income economies, also fund their social insurance programs with payroll taxes. While the Social Security systems of other countries take different forms, most provide government-financed pensions that provide income assistance for retirees, similar to that of the United States.
Despite that similarity, there is much variation in how other OECD countries impose payroll taxes on their citizens. Countries such as the Netherlands, Sweden, Germany, and Canada have caps on taxable earnings that are lower than in the United States others, such as Norway and Ireland, tax all earnings. Generally, countries with higher payroll tax rates have lower caps, while countries with lower payroll tax rates, like the United States, tend to have higher caps or no caps at all. In some OECD countries, social insurance programs are funded through other sources such as income taxes or excise taxes.
Certain countries, like the United Kingdom and Austria, have a bracketed payroll tax structure that levies the payroll tax at different rates depending on total income, similar to how the United States levies income taxes. In the United Kingdom, that bracketed system is regressive in structure, while in Austria it is progressive.
Also Check: Can Lsd Kill
Tax Avoidance Is Legal Tax Evasion Is Criminal
Individuals and business owners often have more than one way to complete a taxable transaction. Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability.
Although they sound similar “tax avoidance” and “tax evasion” are radically different. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is completely legaland extremely wise.
Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, subterfuge, or concealment. Tax evasion is a crime.
How do you know when shrewd planningtax avoidancegoes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent.
Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Why? Because a business owner has more options to avoid tax, both legally and illegals. Here are some of the most common criminal activities in violations of the tax law:
The IRS Criminal Investigation Division is not to be trifled with, as any number of high-profile individuals, from Al Capone to Wesley Snipes, know only too well. But, in addition to the rich and famous who make the news, there are hundreds of convictions of businessmen and businesswomen who attempted to evade payment of taxes.
Secured And Unsecured Consumer Loans
Lenders offer two types of consumer loans secured and unsecured that are based on the amount of risk both parties are willing to take.
Secured loans mean the borrower has put up collateral to back the promise that the loan will be repaid. The borrower risks losing that collateral if he/she defaults on the loan. Lenders offer lower interest rates on secured loans because they have the collateral to fall back on.
Homes, cars, boats and property are good examples of secured loans.
Unsecured loans have no collateral backing them. This means there is nothing to repossess and sell if the borrower defaults. That puts more risk on the lender, who seeks protection by charging a higher interest rate.
You May Like: Frontal Lobe And Depression
Borrowing From Retirement & Life Insurance
Those with retirement funds or life insurance plans may be eligible to borrow from their accounts. This option has the benefit that you are borrowing from yourself, making repayment much easier and less stressful. However, in some cases, failing to repay such a loan can result in severe tax consequences.
Learn more about retirement accounts.
What Are The Required Employee Payroll Withholding Deductions
Employers are legally mandated as part of their tax liability to withhold a portion of employee paychecks for a few designated purposes. These include:
Be sure that employees always have an open line of communication to ensure that you are withholding the right amount. For example, if an employee needs to increase their withholding for child support, it should be a simple process to do so.
Recommended Reading: Bleed On The Brain Prognosis
What Is The Limit On Earnings Subject To The Social Security Payroll Tax
The Social Security payroll tax only applies up to a certain amount of a workers annual earnings that limit is often referred to as the taxable maximum or the Social Security tax cap. For 2021, the maximum earnings subject to the Social Security payroll tax is set at $142,800, an increase of $5,100 from the 2020 level.
When the tax dedicated to Social Security was first implemented in 1937, it was capped by statute at the first $3,000 of earnings . Since 1975, the taxable maximum has generally been increased each year based on an index of national average wages. Each year, about 6 percent of the working population earns more than the taxable maximum, which has been the case since 1983.
Do You Have To Withhold Payroll Taxes From Paychecks
Again, you need to withhold both payroll and income taxes from your employees paychecks. Doing payroll by hand is an option for deducting payroll and income taxes, but this can be time consuming and lead to mistakes. The distinction between payroll vs. income tax is even more important when you get into fringe benefits and taxation.
Recommended Reading: Why Does Brain Freeze Occur
Income From The Sale Of Assets
Taxable: Your gain from the sale of an asset is generally taxable. Your gain is generally your basis , minus the amount you received when you sold it.
For example, if you buy a stock for $100 and sell it for $200 , you have a $100 gain . You also pay tax on your gain from selling business property, stocks and bonds, investment real estate, collectibles and personal items that have gone up in value.
You may need to adjust your basis for other items. For example, you reduce your basis for any depreciation you take on a business asset. You increase your basis for additional expenses, such as major improvements.
Nontaxable: One of the best breaks in the tax code is when you sell your home, you may not have to pay tax on the first $250,000 of gain .
You must own and live in the home for two of the last five years to have this gain be nontaxable, and you must not have taken this exclusion in the two-year period before the sale of the home.
If you receive money from a garage sale, you generally do not need to report the sales because most garage sale items are sold for less than their original cost.
Payroll Taxes: What Are They And What Do They Fund
Payroll taxes fund social insurance programs including Social Security and Medicare and are the second-largest source of revenues for the federal government. In 2019, the most recent year for which data were not affected by temporary distortions resulting from the pandemic, payroll taxes made up 36 percent of total federal revenues. Most working Americans are subject to payroll taxes, which are usually deducted automatically from an employees paycheck. Employers are also often subject to those types of taxes.
- Taxes directed to the Social Security program were created by the Federal Insurance Contributions Act and are levied equally on employers and employees on all wages up to a certain level.
- Medicare taxes for its Hospital Insurance program are also part of FICA and are levied equally on employers and employees on all wages. The HI trust fund also receives inflows from a supplemental tax on high earners.
A few other types of federal payroll taxes also fund smaller programs:
- Employers pay taxes to fund the Unemployment Insurance program.
- Programs to fund retirement for federal employees and railroad workers also receive revenue from payroll taxes.
Don’t Miss: Level 140 Brain Test
Which Describes A Type Of Tax That Funds City Programs
Which describes a type of tax that funds city programs? Local income tax is a type of tax that funds city programs. Further Explanation: Local income tax: Local income tax refers to a collection of taxes for funding the local programs. Similarly, which describes a type of tax that funds city programs Brainly? Local income tax is a type of
How Income Types Affect Your Taxes
United States residents pay two primary taxes on earned income: payroll taxes and federal and state income taxes. Social Security and Medicare taxes fund the two federal programs whose names they bear.
The federal government deducts payroll taxes from your paycheck, and the earnings cap is set at $137,700 for 2020 . An amount equal to 12.4% of your earned income goes toward Social Security, but your employer splits this tax with you 50-50, so you only pay 6.2% in practice.
Medicare works somewhat like Social Security taxes: you and your employer split the tax bill, and each owes taxes equal to 1.45% of your income, for a total of 2.9%. However, unlike with Social Security taxes, there is no earnings cap on Medicare taxes. You must also pay the full 2.9% on any self-employment income, and you cant take tax deductions to offset that amount.
Unearned income works differently than earned income. You dont have to pay any payroll taxes, including Social Security and Medicare, on the various forms of unearned income. However, your unearned income will count toward your adjusted gross income on your state and federal tax returns.
Don’t Miss: Eeg Slowing