By Alice Magos, Toolkit Staff Writer
Social Security taxes are on the rise, for some people at least. The amount of Social Security tax you'll be paying for 2007 may be higher than for 2006, depending on how much you make, but the actual tax rate really hasn't changed a bit.
The Social Security Administration has conducted its annual unveiling of the increased maximum amount of earnings subject to Social Security
(FICA) and self-employment (SECA) taxes. The wage base for the Social Security portion will rise to $97,500 for 2007, up from $94,200 in 2006. So if you're one of the 10 million or so folks who earn more than $97,500, you will be paying more FICA tax to the maximum tune of $204.60. (Remember that there's still no cap on the amount of earnings subject to the separate Medicare tax.)
But the combined rates remain the same in 2007 as in 2006: 7.65 percent for employees and 15.30 percent for self-employed individuals. The 7.65 percent rate is the combined Social Security and Medicare rate. The Social Security portion is 6.20 percent on wages up to the maximum taxable cap ($97,500 for 2007), which will require both employer and employee to pay a maximum Social Security tax of $6,045.00 each. The Medicare portion is still 1.45 percent each, again--with no wage cap.
Let's do an example. Say Joe Doaks earns $120,000 in both 2007 and 2006. Both Joe and his employer must pay $204.60 more Social Security tax in 2007 than in 2006 (6.2 percent of the $3,300.00 difference between the maximums for 2007 and 2006). This is the case despite the fact that Joe's income is the same for both years.
In addition, Joe will have to pay the 1.45 percent Medicare tax on his full earnings of $120,000 for 2007, just as he did for 2006--$1,740 each year. His combined Social Security and Medicare taxes will amount to $7,785.00 for 2007. And his employer will have to cough up the same amount, of course. But the boss gets to deduct this portion as a business expense, while poor Joe can't.
Although the impact on self-employed individuals is greater (because they pay these taxes at twice the rate of employees--12.4 percent for Social Security and 2.9 percent for Medicare, for a combined rate of 15.3 percent), a self-employed individual can deduct half of any federal self-employment taxes. And Mama always said half-a-loaf is better than none, right?
The bottom line is, if you earn the wage base, Social Security tax alone will cost you $204.60 more than the prior year if you're an employee--or $409.20 more if you're self-employed, half of which is deductible. And, as a practical matter, if you're making that much money, nobody's gonna have a tag day for you.
The change isn't very dramatic on the receiving end either. The COLA (cost of living adjustment) for 2007 for Social Security recipients will be 3.3 percent to keep pace with inflation.
- Related items:
- Tax Rate Projections for 2007
- IRS Announces Long-Distance Telephone Tax Refund Amounts
- IRS Outlines Taxpayer Protections in Private Debt Collection Program
Added to the news on October 30, 2006.
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