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SOCIAL SECURITY TAXES INCREASE AGAIN
By: Julian Block
THE TAX ADVISER
This is caused by an increase in the maximum amount of wages subject to FICA, short for Federal Insurance Contributions Act, levies that are better known as Social Security taxes. The tax hike shows up in the amount of FICA withholdings from paychecks of those with wages above the wage base.
Are you unable to recall nonstop media coverage of President Bush approving the decision by an election-year Congress to risk voter wrath and boost the wage base? The rise rated scant attention because back in the mid-1970s Congress enacted legislation authorizing the adjustment to kick in automatically.
There has been no change in the 7.65 FICA tax rate for both employees and employers. But the latest mandated increase of $4,800 (from a maximum of $102,000 for 2008 to $106,800 for 2009) in the wage base for the 6.2 percent Social Security benefits tax triggered an increase of up to $297.60 ($4,800 times 6.2).
Some other numbers need to be crunched to explain why higher-paid earners must pay even more taxes. The 7.65 percent FICA tax consists of two components with different rates. First, the rate is 6.2 percent for the Social Security benefits portion, the old age, survivors, and disability insurance fund. Second, the rate is 1.45 percent for the Medicare fund, the federal hospital insurance program for the elderly.
In 1993, Congress decided to do away with the ceiling on Medicare's wage base. That is why withholding for Social Security during 2009 ends at $106,800, whereas individuals who earn more than $106,800 must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay, etc.
To illustrate the interplay of these numbers, assume Josephine Six Pack earns $106,800 for 2008 and again for 2009. Her tab for Social Security tax: $6,621.60 for 2009, up by $297.60 from $6,324.00 for 2008. Put another way, take-home pay declines by $297.60 for Josephine or anyone else with wages above $106,800, including her spouse, assuming she had the forethought to select a mate with sufficiently high earnings.
Once her wages for 2009 surpass $106,800, Josephine can forget about the 6.2 percent tax, though she still must reckon with the 1.45 percent tax. For each $1,000 above $106,800, she forfeits $14.50 ($1,000 times1.45 percent) to Medicare taxes.
How much must someone receive in salaries, bonuses and other kinds of earnings for Medicare taxes to top Social Security taxes? For 2009, the magic number is $456,662, up from $436,200 for 2008, $416,900 for 2007 and $402,786 for 2006. Going in the other direction, the earned-income tax credit lessens the FICA burden for low-wage workers.
The wage base has gone up every year since 1971, when the figure was $7,800. Back then, the maximum Social Security tax was $405.60. Things have indeed come a long, expensive way since FICA taxes started in 1937, when F.D.R. and Congress capped the tax at $30 for both employer and employee (1 percent of the first $3,000 of earnings). For some years, FICA taxes have exacted a bigger bite than federal income taxes for many middle-income earners.
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Copyright 2009,
