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As a tax auditor , I feel that I treat everyone the same, whether it's the sole proprietorship of a small business or a Fortune 500 company.

Disclaimer: I'm not employed by the IRS and when I do retire within the next couple of years, I plan to go to work on the other side of the table..

buzfluhart wrote:

gibsonlp wrote:What is this "personal tax" thingy?

As personal people, we can't get any of the tax back, how does it work in the states?

It would almost be easier to explain the Evolution of the Cosmos

What do you mean by "almost"?

gibsonlp wrote:What is this "personal tax" thingy?
I mean, here in Israel - we pay income tax (up to %33), social security (5%), health tax (%4) and then we pay 15.5 VAT on everything we buy, some things have extra taxes, like cars which have 140% taxes (including VAT).
As personal people, we can't get any of the tax back, how does it work in the states?

It's really not all that complicated (well, actually, it is). You really don't get any taxes back, you get the amount that you've overpaid back. In the simple case your employer takes out some amount of income tax on every paycheck. At the end of the year, you figure out how much you really should have paid. This amount can vary based on certain things which are allowed to be deducted (this is where it gets complicated), things like certain medical expenses, some interest payments, and all sorts of other things.

This makes your "taxable" income less than your actual income. If you paid in more over the year than you owe based on the "taxable" income, you get some of what you paid in back.

Now, when it comes to business income, it gets far more complicated. There are numerous things that become tax deductible based on being a cost of doing business. So, even though the business brought in some amount of money, the cost of supplies, etc. can be deducted from the income since you could not have made the income without spending the money for the supplies. Then there are depreciation schedules for expensive equipment, where you can deduct some of the cost of the equipment each year for a number of years. This is similar to deductions for supplies. And it just goes on and on the larger and more complicated your business becomes.

Note that I'm in no way any sort of tax professional, so I've probably got stuff wrong in my explanation, but I think it gives the general idea.

cjj wrote: It's really not all that complicated (well, actually, it is). You really don't get any taxes back, you get the amount that you've overpaid back. In the simple case your employer takes out some amount of income tax on every paycheck. At the end of the year, you figure out how much you really should have paid. This amount can vary based on certain things which are allowed to be deducted (this is where it gets complicated), things like certain medical expenses, some interest payments, and all sorts of other things.

This makes your "taxable" income less than your actual income. If you paid in more over the year than you owe based on the "taxable" income, you get some of what you paid in back.

Now, when it comes to business income, it gets far more complicated. There are numerous things that become tax deductible based on being a cost of doing business. So, even though the business brought in some amount of money, the cost of supplies, etc. can be deducted from the income since you could not have made the income without spending the money for the supplies. Then there are depreciation schedules for expensive equipment, where you can deduct some of the cost of the equipment each year for a number of years. This is similar to deductions for supplies. And it just goes on and on the larger and more complicated your business becomes.

Note that I'm in no way any sort of tax professional, so I've probably got stuff wrong in my explanation, but I think it gives the general idea.

Thanks, that's the same as in Israel then, basically - a business (from self employed (with restrictions) to large corporations) register their expenses and the income tax is (roughly) calculated by the income minus expenses, every $ you spend on the business is tax deductible (VAT and income tax)
However - personal people (regular employees such as myself) don't send anything, the accountant at the company they work for is doing everything for them, since the income tax in Israel (and in the rest of the world AFAIK) is calculated yearly, not monthly - if an employee gets an extra money at a specific month (bonus, etc...) - the accountant takes that into consideration and balances everything so at the end of the year, nobody pays even a dime extra or a dime less, basically an employee doesn't need to send anything out and no audits are being made at all.
The only exception is tax deductible expenses for employees such as life insurance that is being paid not through the company you work for (pretty rare) and - if you worked only half year, it's up to you do get the tax back at the end of the year (as there is no accountant to do it for you).

For some reason I got the feeling that employees in the states get some tax back which is quite nice, yet weird.

gibsonlp wrote:For some reason I got the feeling that employees in the states get some tax back which is quite nice, yet weird.

As I said, it's not really tax back, it extra you paid in. It's sometimes referred to as "The IRS Savings Account". They keep your money, pay you no interest, then make you feel like you're getting a nice bonus at the end of the year.

The U.S. situation for employees is pretty much the same as in Israel. The company accountants calculate the amounts and send them in, etc. except it's done with each paycheck. There are some tax forms you fill out that estimate the number of deductions you think you'll be able to take, and that effects how much they take out. That's the main reason why people end up getting some back (or having to pay in more).

On these forms, you can actually put down pretty much whatever you want, so, you could have it set up so that very little is taken out and you will owe almost everything at the end of the year. This is actually the best way to do it since you could get interest on that money. But if you don't have the discipline to actually save it, you may be in big trouble at the end of the year when you have to suddenly come up with thousands of dollars to pay your taxes...

And don't forget those individuals who are self-employed and have to send in their own quarterly withholding payments. (Because they don't have an employer who does their withholding for them.)

Since I am both, I am able to have my regular employer (day job) withhold a little extra from each paycheck, to cover my self-employment tax at the end of the year.

I always laugh; so many people think it's bad to owe tax with their return, because they'd rather have a refund. But they don't realize a refund means you've given the government an interest-free loan. I guess somebody's got to pay for those wars!

I like the "IRS Savings Account," I've truly never heard that one before!

Yeah, I'd rather owe some than get a refund for that very reason JDog!

Thanks CJ,
So I guess the only difference is that I don't need to estimate anything, let's say that someone here gets $1000 month and he needs to pay 10% which is $1200 tax for the whole year's salary ($12k yearly) - he'll simply pay $100 a month automatically, and if he gets a $1000 bonus at the 10th month or so, the accountant will reshuffle everything as if his salary was $1083.33 a month and will take more money for the IRS.
We don't pay ANYTHING in advance and the last month ALWAYS balances out (the accountant is making sure of that and make sure I won't feel anything on my last month, basically, I always got the same amount on the first month of the year and at the last month (unless I got bonuses or a raise ).

However - small business need to estimate their tax payment as you described.