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As the financial sector of the economy undergoes challenges, there is much talk about taxes. Raise taxes. Keep taxes low. What should be done about those much talked about taxes?
For persons who do not own businesses, take a look at your paycheck stub. You will notice deductions for Federal Taxes, Social Security, Medicare, State Taxes. Add the amounts deducted for Social Security and Medicare. Now you would think that the sum of those two deductions is ALL the federal government received for Social Security and Medicare relative to your paycheck. Not so. The federal government actually received an amount equal to double of what you got when you added the amounts deducted from your paycheck for Social Security and Medicare. How can that be? Where did the extra money come from? It came from your employer.
What a lot of workers do not know is that every employer is required by the IRS to match dollar for dollar (and penny for penny) the amount deducted from your paycheck for Social Security and Medicare. That means in addition to the amount of cash needed to cover your paycheck, your employer must also have enough cash to match your deductions for Social Security and Medicare. Also, just as you want your paycheck on time, so does the government. Your employer must send that money to the IRS by a certain date or face financial penalties that accrue by the day (gets greater for each day the payment is late)!
What would happen if your and employer did not have enough cash to make the payroll? For example, what if your employer has enough cash to cover your paycheck, but does not have enough to match your Social Security and Medicare deductions? Well, your employer could go to a bank (or some other source) and borrow the money to make the payroll. Or your employer could lay you off your job.
During a financial crisis involving the banking industry such as what the United States is going through right now (2008), if an employer is low on cash and cannot make a payroll, banks may not have the money or be willing to loan money for your employer to make the payroll.
Now supposed the federal government raises taxes on employers. This will put a further strain on the amount of cash a business has to meet its non-tax obligations, such as regular business expenses and…payroll. Who is at risk now? Think about it.
The next time you hear talk about raising taxes. Listen very closely to EXACTLY what is being said. Find out about the financial health of your employer. Check out the environment in which your employer does business. Determine whether or not your employer could be placed into a severe cash flow strain by a tax increase. Then you make your own decision in favor of your own paycheck.
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