This sounds crazy to me. Maybe you're living in a place with a really high cost of living? What's included in "services, utilities, fees, and taxes that you pay when earning $100k" ?
Payroll taxes* = $ 15,300
Federal income taxes = $ 6,500
CA income taxes = $ 4,000
ACA Subsidy = $ 12,000
Food Stamps = $ 8,000
EITC = $ 5,000
Disability = up to $30,000 if applicable
Energy credits = ???
Housing credits = ???
Waived fees = ???
Every progressive subsidy is mathematically equivalent to a progressive tax. The $12,000 ACA "tax credit" is actually a $12,000 progressive tax. It's the single largest tax hike against the middle class... possibly ever?
This doesn't even get into the property tax side of the equation, since we're talking direct cost of working, not cost of owning things like houses, and cars. But that's part of the overall conversation of the war on the middle class. [Edit] There are even property tax circuit breakers where you get credits on property tax for earning less, so that should be in the above table. That's separate from housing credits such as means-tested rent control.
Then you can start to pay for the personal costs of actually going out and earning that income.... everything from child care, to transportation, to business clothes, etc.
And then that's still not even counting opportunity costs, e.g. I'm too busy at work, now I have to pay for a plumber, contractor, mechanic, landscaper, take-out dinner, etc. versus doing it on my own time. Think, all the things you could do for yourself in 2,080 hours per year...
* Don't be fooled by the employer hiding half the cost from you.
You can't count it as a cost on you without adding the value of the employer share to your base income.
> Every progressive subsidy is mathematically equivalent to a progressive tax.
Wrong. You've basically made the same error as you did with employer share of payroll tax -- a progressive subsidy is arguably analogous to (but "mathematically equivalent" is still too strong of a term):
1. An addition to your income (whether or not you receive the benefit, maximum or otherwise) equal to the maximum benefit provided, and
2. An additional tax equal to the difference between the maximum benefit and the amount you actually receive.
Its absolutely not even similar, much less "mathematically equivalent", to the latter alone, which is how you presented it.
I agree with you, but I think I did that. I was trying to say $100,000 of payroll expense causes $15,300 of payroll taxes. Then the other taxes, and subsidy phase-outs, pile on from there.
> Its absolutely not even similar, much less "mathematically equivalent", to the latter alone, which is how you presented it.
You are right, they are not "mathematically equivalent", let me try again;
By "progressive subsidy" I mean a declining benefit as you earn more. That is, income from the government which decreases as you earn more. An example is Medi-Cal and ACA subsidies, food stamps, shit we didn't even mention SSI, etc.
By "progressive tax" I mean an increasing tax rate as you earn more. That is, an increasing number of cents out of each dollar in payroll expense is confiscated as you earn more. An example is Federal Income Tax.
The progressive subsidy offsets the benefit of early income, the progressive tax offsets the benefit of later income. The net effect is reducing the vast majority if not all of the the "Realized Family Benefit" from $0 - $150,000 of [household] payroll expense! I mean, it's disgusting to think about that way, but it's the economics of the system we've created.
> I agree with you, but I think I did that.
You did not. Or you calculated the tax wrong, but it looks more like the former than the latter.
> I said $100,000 of payroll causes $15,300 of payroll taxes.
You said when "earning" $100k, you pay $15,300 of payroll tax, you did not say $100k of payroll causes $15,300 of payroll tax -- and interpreting earning in the usual way for such a discussion (i.e., the income shown on your pay stub subject to payroll tax) -- this is exactly correct; at $100k of such income, the total payroll tax (employer + employee share, Social Security + Medicare) is exactly $15,300.
If you are looking at the employer's payroll expense, however, though, that's not $100k, its at least $107,650 (the employee's income subject to payroll tax -- which includes the employee share of the tax -- plus the employer share of the tax.)
Earning $100k to me means providing services worth $100k. It's obvious when it's 1099 or self-employment. On a $100,000 '1099' or Schedule C income you owe $15,300 of payroll tax. I pulled the number straight from Schedule SE, Line 5. You will pay less income tax as a result, due to the 1/2 (e.g. $7650) deduction from income tax on Line 6. (I tried to account for that in my estimated $6500 of Federal Income Tax due, an effective 6.5% rate)
Somewhere along the line the Fed tricked us into subtracting 7.65% off our W-2 compensation before we even see it, and even got us to think we didn't even earn it. It's fully institutionalized now. It's like VAT being baked in and no one thinks they're paying the tax, but they are!
In my earning $100k example, the reported "Compensation" on the W-2 would be only 100,000 / 1.0765 = $92,893. My point is your W-2 is lying. The company is paying $100k for your services, and the IRS has their fingers in it before you even see it.
Anyway, we are arguing a very minor point to a very serious issue. I think I've provided enough numbers that are accurate enough to see the insanity of the whole system. It doesn't really matter when in the "pipeline" the $7,650 is confiscated. It's enough to know that FICA is 15.3% of every dollar up to $117,000 per person, $234,000 per household.
No.
> It's obvious when it's 1099 or self-employment.
Ah, I see what you did -- you made the mistake of thinking that self-employment tax and W-2 payroll taxes are functionally identical, but just the way W-2 reports it is different and misleading. This is decidedly not the case, while the self-employment tax has the same rate as the combined employer + employee share of W-2 payroll taxes, the base value isn't comparable (since the latter is based on W-2 income, while the former is on the total, which is effectively equivalent to W-2 income plus the employer share of payroll tax.)
As a result, the self-employment tax has a greater effective rate than the payroll tax, even though they have the same nominal rate.
> Somewhere along the line the Fed tricked us into subtracting 7.65% off our W-2 compensation before we even see it, and even got us to think we didn't even earn it. It's fully institutionalized now. It's like VAT being baked in and no one thinks they're paying the tax, but they are!
Perhaps, but the problem with your analysis isn't disagreement over who is paying the tax, but it is how you calculated the amount of the tax and what the income is that goes with it. Payroll tax and self-employment tax server similar purposes and have identical nominal rates, but do not have equivalent bases. So, if you make a statement about payroll tax and how it relates to the income it is based on, but your logic is driven by self-employment tax and the income it is based on, the conclusion will be incorrect.
To be clear, yes there is a different convention for quoting the "salary" based on W-2 vs 1099. I agree that saying "$100k of W-2 Salary" is like saying "$109,031 of 1099". In both cases you net $92,350 after payroll taxes.
To your point, the difference in total payroll expense is $1,381. I'm sure my overall point does not sway on $1,381. Yet this difference will be almost exactly offset by the $7650 deduction allowed against Federal income tax!
Bringing me back to, we are saying the same thing, in two different ways.
Sorry everyone for the rat hole, I wish I stated it more clearly at the on-set. I think there's a more important discussion to be had here.
(Note: I edited this about 15 times over 20 minutes since the first 'Submit'. Dragon's response came against an early draft! Sorry D.)
No, its a mathematical fact.
> I agree that if all you consider is the verbal, "I'll pay you $100k W-2" is actually agreeing to a payroll expense of (at least) 7.65% more than saying, "I'll pay you $100k 1099". But companies don't set salaries that way!
Its not a matter of how companies set salaries, its a matter of the mechanics of the calculation of the tax.
Granting for now your argument that total payroll expense for a W-2 employee is comparable to total payment to a contract employee that must pay their own self-employment income, and considering (for simplification) only W-2 income and payroll taxes in payroll expense for the W-2 worker:
For a W-2 employee with a $107,650 total payroll expense, they will have a $100,000 W-2 income, and $15,300 in payroll taxes (employee + employer share), and (excluding any issues which make W-2 payroll tax income different from W-2 income tax income) $100K in income-taxable income
For a 1099 contractor paid $107,650, they will have $16,470.45 in self-employment taxes and (excluding any other issues which make self-employment tax income different from income tax income) $99,414.77 in income-taxable income (due to the income tax deduction for half of the self-employment tax.)
> We pay employees based on the total cost of payroll. That was my point way up there about Macro Econ 101.
Self-employment taxes and payroll taxes bear a different mathematical relationship to total expenses to the party paying the employee. This is completely orthogonal to any argument about whether, in the case of the W-2 employee, they effectively bear the cost of the employer share of the payroll tax in the form of depressed nominal wages, as well as bearing the cost of the employee share.
> I can easily make up the difference by the higher Fed Income Tax rate (due to missing the $7650 deduction),
The W-2 employee doesn't really miss the deduction for half of the self-employment tax that the self-employed worker gets, since the income which pays half of their payroll tax isn't part of their taxable income to start with.
> local taxes, property taxes,
Local taxes and property taxes tend not to be directly income-contingent (and tend to be regressive in net effect), so they probably hurt your point rather than helping it.
> To your point, the difference in total payroll expense is $1,381. I'm sure my overall point does not sway on $1,381. Yet this difference will be almost exactly offset by the $7650 deduction allowed against Federal income tax!
Why would you compare the difference in payroll expense to the deduction against Federal income tax? What are you trying to get at with that? It doesn't make sense to talk about that.
Also, on your current numbers, the deduction the 1099 worker gets (half of the self-employment tax) is more than that ($8,340.87 vs. $7,650), but it still leaves the 1099 worker with a higher income subject to income tax than the W-2 worker, so it doesn't "make up" for anything -- the actual total tax difference between the two is greater than the additional payroll tax paid by the 1099 worker, since the 1099 worker will also pay greater income tax, all other things being equal.
- You can't subtract the opportunity cost of not working from your income when you make $115k, because you've made the decision to work and earn that salary. - The EITC is for people who work (hence the "earned" part). If you chose to go exclusively on govt assistance, your max EITC is $11 for a family of 4: http://www.irs.gov/uac/Newsroom/Earned-Income-Tax-Credit-Do-...
- I don't doubt that there is a measurable amount of disability insurance abuse, but the fact remains that you probably have a disability that prevents you from doing child care. The poor still often have to pay for childcare. In any case, the average annual benefit for a family of 4 comes to about $24k, not $30k: http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
Subtracting the opportunity cost of not working from vs working at 115300k muddies the comparison. It's more sensible to compare the two scenarios separately:
115300-15300(payroll tax)-6500(fed tax)-4000(CA tax)-8000(foodstamp equivalent food cost)-2600(typical employee cost for PPO-health program)= 78900
vs.
12000(ACA)+8000(food stamps)+11(per EITC comment above)+24000(per disability citation above) = 44011
Even this comparison isn't apples to apples. In the $100k figure, are you accounting for the employer paid portion of health-insurance (and the lower rates that those in a employer-negotiated plan pay?), any tax-free employer retirement plan contributions, and other pre-tax benefits (DCAP, flex-spending account, employee health insurance contributions?). If you own a home, are you accounting for the mortgage interest and property tax deduction?
I do agree with one sliver of your argument: making financial progress on $100k income is challenging for a family of 4 in VERY high cost-of-living places such as the Bay Area, where that remaining 79k easily gets eaten up by childcare, housing, food, transportation, etc.
Is the standard of living on the $115k salary equivalent to that of a family of 4 on govt assistance? I don't know, but I doubt it, and I would bet on the latter's standard of living being significantly worse. Neither situation is easy street.
EDIT: wording. EDIT2: formatting
Actually, only half (the employer share) is.
Going from "Payroll Cost" on the Company Income Statement to "Net Benefit" on the Family Annual Budget, $140,000 becomes about $15,000, and actually often times much less, or negative.
You have to take a careful accounting of where all the money is going, and what your expenses would have been had you NOT earned any of that money, and just stayed home. Unfortunately, it's an extremely demoralizing exercise.
If you go a step further, and even say I'm going to earn some gray-market money off-the-books from home instead of taxable income... then you really do just throw in the towel. But all the numbers I'm quoting are assuming the completely legal and above-board approach.
The good news for all the self-employed boot-strapping startups out there; STOP paying yourself. It's the absolute worst use of your company's cash. If you take a full and honest accounting, you aren't actually paying yourself anything, you're mostly just paying government taxes and forgoing government benefits. Think of it as the unwritten startup tax credit if it makes you feel better! :-)
Whether or not that's true, that's already reflected in you showing the full cost of payroll taxes (employee + employer share) as an expense to the employee. What you failed to do is show all of the income that pays that expense (including the money from the employer that goes directly to paying the employer share) as part of the income from which that cost was being paid.
> The good news for all the self-employed boot-strapping startups out there; STOP paying yourself. It's the absolute worst use of your company's cash.
Perhaps its worse for your company, OTOH, it mitigates the risk to you should the company -- as many do -- fail, since in that case you will have forgone labor income for equity in the failed firm.
I run a business, from my perspective the meaningful number is the total payroll cost for the employee. Taxes are taken before it even leaves my pocket and goes to the employee, and then more and more taxes by the time the employee finally sees it. You can't waive away the taxes just because the law says you can't show the true tax burden on the pay stub.
> Opportunity Cost
There are real, direct, added costs to choosing to work. It's reasonable to subtract those from salary when trying to calculate the net benefit of working. Just like there's an opportunity cost for waiting in line for bread. It's a real thing.
> $115300 -> $78,900 vs. $0 -> $44,011 (for a gap of $35k)
First, you can't take home quite $78,900 on $115,300 -- you've shifted up income but haven't adjusted taxes accordingly. From my perspective that employee is earning more like $140,000 (you can't just waive away the cost of paying for all those benefits that otherwise would be provided free by the government, just because they are taken out of your earnings before you see them).
Second, you can't just count $100 / pay period as the cost of insurance. It's the full cost of the plan (up to almost $24k / year for Platinum insurance for a family of 4) that has to be paid every two weeks at payday. Benefits are tax advantaged income, income paid out before you see it, but income all the same. If you are self-employed all this becomes obvious, but if you've never worked outside a W-2 the true cost is very much hidden out-of-sight.
Employer group insurance plans are more expensive than individual plans, which are obviously way more expensive than free means-tested plans. Going from $0 -> $30k you lose about $8k of value from losing Medi-Cal and going to the Cost-Shared Silver Plan. Going from $30k -> $60k you lose another $12k of subsidies. "Total actuary value" of having Medi-Cal is around $20k / yr for a family of 4. So if you are at $0 income, it's not just +$12k for ACA subsidies, it's more like +$20k for Medi-Cal since it's comparable coverage to a Platinum plan.
Third, yes the EITC phases-in and phases-out, it doesn't mean it's not a cost you pay for earning more. It's a curve and it's not a straight line, but it's still a real refundable tax credit that is clawed back as earnings increase over $24k. I agree it's impossible to maximize all benefits concurrently, it's a very complex equation with local and global minima/maxima. One day I really hope to be able to program it and put in on GitHub.
> Making financial progress on $100k income is challenging
So very true! Even per all your numbers, which are way more conservative than mine... the 'net benefit' to the family of earning "$115,300" of income (~$140k payroll) is only $35,000 !! (the gap)
And if you dig deep into all the assistance available, start counting things like income-based rent control, income-based property tax limits, income-based car registration fees, income-based electricity bills, etc.... you can easily erode that $35k down to more like $15k.
Isn't that just astounding?! Starting at $140k of employee payroll expense, by the end of the year you've only added $15k of net cash benefit to the family?!
As they say, "What the actual fuck!"
While grandparent made an error of including both halves of the payroll tax, when only the employer share should have been added, the point is that employer share (while it can be considered "income" of a sort that goes directly into paying payroll taxes), isn't taxable income subject to any other taxes, so properly counting it as part of the "income" number if you are counting the whole payroll tax (including employer share) as part of the tax expense doesn't shift up the taxes, it just correctly accounts for the income that goes with the taxes originally presented.
I don't want to argue the mechanics of taxation on W-2 vs 1099! I was totally happy to accept 'danans' much more conservative numbers because we still end up with a maximum of $35,000 net benefit from $115,300 of compensation!
This is, with danans math, which is adjusted from mine by not even counting;
Employer portion of health care cost
Employer share of FICA
Excluding direct employment costs
Excluding indirect opportunity cost
Use average disability payment, instead of max
Exclude SSI payments
Exclude rent control
Exclude property tax circuit breakers (21 states, not CA)
Exclude EITC
Like I said, the only way to properly calculate all this is to code it all up and chart it. But the laws are insanely complex (we've proven that just now, right?) I don't think anyone has ever tried.