Where Do Your Business Taxes Go?

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Before I turn it over to Rick, please feel free to text your questions either in the chatbox or the Q and A box. Both are listed at the bottom of your zoom screen. If you'd like to ask a live question please raise your hand and I'll turn on your speaker at the end of our talk when we get into our Q and A session. Okay, well, Rick, take it away.

Rick Bromund: Thanks, Fran. As Fran said, I'm Rick Bromund. I head up the tax research department. I just wanna thank everyone for joining us today. I know I'm always curious where my tax dollars are spent, so I'm sure you are as well. So we're gonna take a dive and just see what the numbers say. So first off, what are business taxes? We're gonna break it out into two separate categories, federal and then state and local.

So federal business taxes, the main drivers are income, which includes individual and corporate income taxes, and employment self-employment, which is also known as payroll tax. For employment/self-employment tax, you have social security, which the official name is OASDI, which stands for old age and survivor's insurance and disability insurance, Medicare, unemployment insurance, and then withholding.

Before we get into some of the numbers, we're gonna look at some scenarios about the payroll tax because it can vary depending on your employment situation. So we have a couple of scenarios here for payroll taxes. Scenario one, if you're a business owner with one or more employees, the social security tax rate is 12.4%. So if you're an employer with an employee, you are responsible for 50% of that rate so that is 6.2, and then the employee is responsible for the other 50% percent. And the same goes for the Medicare portion. It's split equally amongst employer and employee. Unemployment insurance, you'll see the third line, is a hundred percent responsibility of the employer and that's 6% of the first $7,000 in wages.

However, depending on the state payroll taxes you may pay, an employer can receive a federal credit of up to 90%,or essentially 5.4 of that 6% would be covered. So the employer would only be responsible for that 0.6% left. And then the final one is federal withholding, which is solely the employee's responsibility. So it's a hundred percent to the employee and I just used a general 22% tax rate to show that scenario.

For scenario two, it's a business owner with no employees, so still responsible for the social security and Medicare tax. So that full 12.4 and 2.9% is payable by the employer. However, without any employees, there's no unemployment insurance to be collected. And there's no federal withholding since there are no employees. So what's good about the payroll tax and allocation if we're trying to find where those funds are spent, three of the four go into funds pretty much designated directly for those specific taxes. Medicare goes to a hospital insurance fund which is known as Medicare part A. Social security or the OASDI goes into two funds, which are the old age survivor fund and then a separate disability fund. Unemployment insurance goes directly to an unemployment insurance fund and withholding goes into a general spending fund.

Now, since we know where payroll tax is allocated, we're gonna take a look at some of the other sources of federal revenue and how those dollars are spent. So the federal revenue which for the fiscal year 2021 was just over 4 trillion dollars. As I mentioned, we have the social security Medicare portion that takes care of 30%, we know where those tax dollars are going.

Individual income tax accounts for 50% or 2 trillion dollars of all revenue that the federal government brings in. The next biggest one is corporate income tax at 9% or 371 billion and then other various taxes make up 479 billion or 11% of the federal revenue source.

So where does that money go? Here are some of the top spending categories for the federal budget. You have various assistance programs, which as I mentioned, theMedicare tax goes into the health insurance fund, which is Medicare part A. However, there are also Medicare part B and D, which is not part of that tax collected. So the general fund funds the different parts of that Medicare program. Defense and security are huge costs as well, interest on debt accounts for about 8% of the federal budget. You have federal retirement and veteran benefits, education infrastructure, and then science and medical research round out the top spending categories. There are other spending categories as well, but it gets down into really various other subcategories.

So that's how federal tax dollars are spent. We want to take a look now at the state and local portion of it. Similar to federal, there is an income tax portion, which has individual and corporate.What's unique about the state income tax is not all states have an income tax or some will only tax individuals or some will only tax corporations. On the flip side of that, some states have an income tax, not only at the state level, but they also have a county and city-level income tax as well.

Again, payroll tax is still implemented at the state level.However, the differences to note here, no social security or medical tax is levied at the state level, withholding an unemployment tax or unemployment insurance is the only part of the payroll tax at the state level. However, that's gonna, again, depend on your current situation. If you don't have any employees, you're not gonna be paying unemployment insurance. And if you do have employees but you're in a state with no income tax, you're not gonna do any income withholding for those employees.

So really what you'll see has the two big drivers for state and local taxes are sales tax and property tax and sales tax is collected at the state level. However, there be additional layers of taxes such as county and city. Property tax for the most part is collected at the county level, but there are some instances where it's collected at the city or township. So when we look at state revenue sources, you can see a third of it comes from the federal government. So we laid out those categories of federal spending, some of that money through those programs or various other spending trickles down to individual states.

And an important thing to remember here is obviously with 50 states in DC, these are just averages of the various incomes. Obviously, a state that does not have a sales tax is not gonna make up a portion of its state revenue. But with that said, sales tax accounts for overall 23% of state revenue, miscellaneous accounts for 19, and that includes state university tuition, hospital fees, tolls, and things like that. State income taxes provide 18% of revenue source, other categories, such as fees, the state, and other taxes bring up five, and then corporate tax rounded out at 2%.

So how are state dollars spent? Kind of similar, it goes to various assistance programs.You have K through 12 education, health programs, higher education, state police correctional spending, infrastructure, of course, you have interest on debt again and then various in other. And again, these are the general spending categories, by average, depending on your particular state, they may spend more or less on education, health programs, things of that nature. So that's at the state level.

We're gonna look at the local level now for business taxes. So the first one we're looking at is sales tax and sales tax is collected at the state level, has a state rate, but it can also have different levels of taxation, such as city and county. For example, if someone is sitting in the city of Chicago, they will have a 10.25 rate and that's considered a loaded rate cause it has levels of taxation in there. So if we look at a breakdown, we see that the state of Illinois accounts for 6.25% of that rate, Cook County, which is the county Chicago's in, is 1.75, and Chicago is one and a quarter.

And then you'll see this sometimes in bigger cities. They may go by different names, but it's RTA, which is a regional transport authority. And in this case, in addition to cook county, there are five other counties that surround it that have this RTA and it goes to fund the various transportation services, buses and trains, and things like that. When you're looking for a breakout of where your sales tax goes, it's not as clear definitely as the payroll taxes, it's more like on a proportion basis. So you can see the 6.25 that goes to the state so it goes up to that state revenue and they spend it out to those various programs. Cook county, it would go to the county fund, part of the general pool ,and then spending on the county issues. Same thing with the Chicago portion. It's only really the RTA that you know, that 1% collected goes directly to that authority and it's spent on those authority-related categories.

Local business taxes continued. I mentioned there's property tax. There are two types of property tax, real and personal. Real property is land building and other structures and all states and DC have a real property tax. Personal property is items that can be touched or moved. This is like the machinery equipment, computer, supplies. When I first got into property tax consulting, the basic analogy they gave is the real is the building and the land that it sits on, and if you could pick up that building and shake it, anything that fell out would be personal property.

One quick thing to note is in this context, we're talking about business personal property, depending on where you live and what state's tax, we can call it individual property. You'll see, you may have to pay property taxes for your car, RV or boat, or things like that. But for the purpose of this conversation, we're talking about machinery and equipment, computers and supplies, and all business-related items.

So with that in mind, 38 states and DC have a personal property tax relating to business equipment. And this is gonna be the final slide in the webinar. And I saved it for last cause, in my opinion, you can't get a better standard for our breakout when you're looking to see how taxes are allocated. On a property tax bill, as you have here, you have the total amount at the bottom and you have specific line item categories to show exactly of that total amount down to the cent where each dollar is spent.

For instance, the top line, you have $2,200 going to the high school, the amount going for the library all the way down the line. So I know on some of the topics we covered of how your money spent is outside from the payroll tax, it's kind of general, it goes into a general fund and it's dispersed from there. But again, I saved this one for last cause, in my opinion, it's a gold standard for showing how your tax dollars are allocated. So that wraps up our webinar about where your business taxes go and how they're spent. So I thank you for joining us.

Fran: Yes, that's awesome. So let's just go ahead and open up to answer some questions. Just a reminder, you can drop your questions in the Q and A or chatboxes now or you can raise your hand using the reactions option and ask your question. Please keep in mind, keep your questions about the subject matter. I think it's just really helpful as Rick has gone over some really great stuff here. And we have one question, so let's go ahead and get to that one. If I am an employee of my business, do I owe unemployment insurance?

Rick Bromund: So the general rule, if you're the sole employee, you don't pay unemployment insurance. Unemployment insurance is only for if you have employees. Because it varies from state to state, but some states will consider if you were working but not making income and you're the sole employee, they still consider you employed and you're not able to benefit from the unemployment insurance.

Fran: Great. Another question is, can I pay all my taxes through the federal portal?

Rick Bromund: I guess it depends on what taxes... All federal taxes or are we talking like on the various state-level taxes as well? I guess I need more clarification on that.

Fran: All state and federal.

Rick Bromund: All state and federal. Honestly, you know, I'd have to look into it more. From my understanding, the federal taxes and the federal portal, I would say it's the federal taxes can be paid through the federal portal, but the various states have to be paid directly to them.

Fran: Wonderful. We'll give people some time if they have more questions. Obviously, people always want to know how they can save on taxes. Are there any general practices they can take to save for taxes?

Rick Bromund: Of course, full disclaimer, right. To get detailed information about your specific situation, you should always contact an advisor, so they know your full scope of circumstances. But in general, you wanna make sure you're utilizing deductions that are available to you. And again, make sure you're verifying that they do apply to you.

You can also contribute to various retirement funds. There are other deductions for that. So it really depends on your particular circumstance and situation. And again, sitting down and talking with an advisor and laying out your specifics, they'll be able to give you a detailed answer specifically tailored to you.

Fran: I like that. I think that it happens where we think we can just do one step and it answers everything for us, but that's not the reality when it comes to the world of tax. So it looks like we do not have any other questions. But I just want to thank you, Rick, for enlightening us on today's episode of where your business taxes go. And thank you, everyone, for joining us.

A recording of today's episode will be available and emailed to you at a later time. For more information about ComplYant, or if you missed an opportunity to ask your question, feel free to email us at hello@compYliant.co. Again, that is H E L L O @ C O M P L Y A N T. CO. You can also send us any suggested topics you'd like us to cover in our upcoming webinars. Thanks, everyone, and have a great day.