Retirement Tax
March 17, 2009
Retirement taxes, as the name suggests is tax levied on the amount retired individuals are paid. In a number of countries which have social security systems, they provide retired citizens with an income thus they fund the system using specific committed taxes. Retirement tax greatly differs from inclusive income taxes as they are charged only on specific income sources, normally known as payroll taxes
Another difference between comprehensive income taxes and retirement taxes is that the overall amount of the taxes paid, by the worker or on behalf of the worker, is considered in the final calculation of the retirement benefits the employee is entitled to.
Payroll Tax
This broadly refers to two kinds of taxes; the first type is the tax paid on behalf of the employee by the employer. This type of tax is directly related to employment and the levied tax amount can be fixed rate or it can be a charge proportional to the employee’s pay. Pay-As-You-Earn (PAYE) also referred to as Pay-As-You-Go (PAYG) is the other type of payroll tax. This is an amount that the employer withholds from the employee’s pay. As the name suggests, the tax amount is proportional to the employee’s salary.
Retirement tax is to some extend viewed as a regressive tax in its immediate effect in that, in a country like the United States, employees are levied at the same rate, regardless of the income, up to a particular cap, and any income above the set cap is tax free. Still on point, the retirement tax is regressive because it exempts taxation on investment income and all other forms of earnings that are more probable to be received by the rich retirees.
However, on a positive note, the regressive effect on retirement tax is rather offset by the ultimate benefits payments, which characteristically reinstates a higher percentage of a lowly paid employee’s pre-retirement earnings.
Examples of retirement tax
The most common examples of retirement benefit include the (NICs) National Insurance Contributions, which is collected in the UK by and on behalf of the employee to fund the national insurance system of the country. And the other example of retirement tax is the FICA (The Federal Insurance Contributions Act) collected in the United States also from both the employees and employers to fund the social security system of the country.
National Insurance Contributions
The constituent of this tax system consists of taxes paid by the employers and the employees on the employee’s earnings and also on the employer’s specific additional benefits which are provided to the employee in kind. If individuals are self employed, the taxation is calculated based on their profits.
The advantage constituent of this tax system is some contributory benefits whereby the retiree’s contribution history will determine the amount of benefit to be paid, and the availability of the amount. The claimants receive weekly benefits as well as a lump sum amount upon retiring.
The Federal Insurance Contributions Act
FICA is tax imposed on employees and employers to finance Social Security and Medicare. Basically, during one’s working career, the amount they are levied in Payroll taxes is indirectly linked to Social Security benefits income that they receive upon retirement. It is in light to this that many claim payroll taxes is not a tax system because the collection is indirectly connected to a benefit.
However, others argue that a number of taxpayers are levied a higher amount in payroll taxes than they are levied in income taxes. It is consequently the reason why FICA tax is to a greater extent believed to be a regressive tax on earnings, with no set deduction or individual exemption deduction.
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