As you may have heard, the fiscal cliff was avoided, and many tax provisions were extended that are favorable to individuals and businesses. But there are some new taxes that may have an impact on business owners. Here's the lowdown. [Bear in mind Inc. Well exists not to serve as your CPA but merely to offer you advice. Always consult an expert. We are just here to get you thinking! —ed.]
Basically, we can break down taxpayers into three categories: those who earn under $200,000 ($250,000 for married), those between $200,000 and $400,000 ($250,000 and $450,000 married) and those over $400,000 ($450,000 married). The amounts below reflect single filers -- you would adjust them accordingly to the parentheticals above if you’re married.
For those under $250,000, really the only change for you is that the 2 percent payroll tax holiday expired on December 31, 2012. Thus, all employees (including owner employees of corporations) will see smaller paychecks this year. The capital gains and dividend tax rates for these taxpayers are the same 15 percent they have been for a few years now.
For those between $200,000 and $400,000, the Patient Protection and Affordable Care Act taxes come into play which can further be divided into two categories: a 0.9 percent Medicare surtax on earned income and a 3.8 percent Medicare surtax on net investment income.
The .9 percent surtax on earned income basically means for every dollar you earn at your job over $200,000, an additional .9 percent tax is due. The surtax applies only to the employee’s share of Medicare tax. Employers (corporations, partnerships, etc.) don’t owe (i.e. have to match it). Employers do have to start withholding it if the employee reaches $200,000 of income.
The 3.8 percent surtax on net investment income applies to unearned income. This surtax is levied on the smaller of your net investment income or the excess of modified AGI over the applicable dollar threshold ($200,00). Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. In this instance, your capital gains rate would be 18.8 percent (15 percent + 3.8 percent).
For those over $400,000, all of the above of course is true with some further taxes. A new top tax rate of 39.6 percent applies on ordinary income, as well as a 5 percent hike tax on capital gains and dividends. In other words, the top rate for capital gain and dividends is 15 percent plus 5 percent plus the 3.8 percent surtax noted above on dividends and capital gains (23.8 percent total).
That’s the gist of it.
John Stanfield is the managing principal of Stanfield & Associates LLC. He is a tax and financial expert that can provide valuable and helpful tax tips and tax advice for both individuals and small business owners. John holds a Masters Degree in Accountancy from DePaul University and is a licensed Certified Public Accountant in Illinois. He is also a member of the American Institute of Certified Public Accountants and the Illinois State CPA Society. Follow @StanfieldCPA on Twitter and join the conversation at facebook.com/StanfieldCPA.