For High Earners, FICA Taxes Increase in 2009
Oct. 27, 2008 (SmartPros) Highly-paid wage earners will see a moderate increase in the wage base on which Social Security taxes are due for 2009, according to CCH.
The 2009 wage base of $106,800 is $4,800 higher than the 2008 amount, and the maximum additional Social Security tax that might be collected on someone earning above the 2008 wage base is $297.60. This increase in the wage base is the largest in dollars and cents ever. However, as a percentage, the 4.7 percent increase is only slightly higher than the average increase of 4.1 percent during the 20 years that the 6.2 percent Social Security tax rate has been in effect.
The tax increase will show up in the amount of Federal Insurance Contribution Act (FICA) tax deducted next year from the paychecks of those earning above the 2008 wage base. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of FICA has held steady at 6.2 percent since 1990, the amount of wages subject to the tax can, and usually does, increase each year, based on a national wage index. The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system.
The tax rate for the "Hospital Insurance," or Medicare, portion of FICA is 1.45 percent, and it applies to every dollar of earnings. This amount also is matched by employers.
"Taxes for self-employed individuals use the same earnings base, but the rates are double those of employees, since the self-employed must also pay the ‘employer’ portion of the taxes," said Avram Sacks, JD, CCH Social Security law analyst.
"This means that high-earning, self-employed individuals may owe as much as $595.20 in additional self-employment tax in
2009," Sacks said. "However, they can recoup some of this amount through a deduction on their federal income tax."
About 11 million workers will be affected by the higher wage base in 2009.
Increase Less Than Estimated
The wage base for 2009 is $300 higher than the estimated increase published in the 2008 Annual Report of the Board of Trustees of the Federal OASDI Trust Funds issued in March of this year. The 2009 wage base reflects national average wages for 2007, the variable upon which the 2009 wage base formula is based. The 2007 national average wage index of $40,405.48 is 4.54 percent higher than the 2006 national average wage index, and the third highest percentage increase since 2000; however, the increase in national average wages is just slightly higher than the average increase of 4.1 percent over the past 20 years.
"The 4.5 percent increase is relatively close to the 4.3 percent increase predicted by the Social Security trustees in their March report," Sacks noted.
Consequences for Revenues, Benefits
"The wage base also is a benefits base," Sacks noted. "Only earnings up to the wage base are considered in calculating Social Security benefits. As a result, those who pay more now should receive more later. Some private pensions also use the amount of ‘covered compensation’ – that is, compensation up to the wage base – in calculating their benefits as well."
There will be an increase of $100 next year in the amount of wages a domestic worker can earn without being subject to FICA taxes. In 2009, you can pay a domestic worker, such as a maid or nanny, up to $1,700 without having to wrestle with federal withholding on wages.
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