BGBC Partners, LLP Tax Update:
Understanding Social Security Taxes and Wage Base Increases
As a grocery store owner, one of the many contributions to the community is that you provide jobs. Payroll taxes are a necessary part of having employees and social security taxes are a major portion of payroll taxes. In this segment of our Tax Update we dissect these social security taxes into their various parts, and make you aware of the projected increase in the wage base for 2017.
Background. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers-one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).
The FICA tax rate for employers is 7.65% - 6.2% for OASDI and 1.45% for HI.
For 2016, an employee will pay:
(a) 6.2% Social Security tax on the first $118,500 of wages (maximum tax is $7,347.00 [6.2% of $118,500]), plus
(b) 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
(c) 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). ( Code Sec. 3101(b)(2) )
For 2016, the self-employment tax imposed on self-employed people is- 12.4% OASDI on the first $118,500 of self-employment income, for a maximum tax of $14,694.00 (12.40% of $118,500); plus
- 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), ( Code Sec. 1401(a) , Code Sec. 1401(b) ), plus
- 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). ( Code Sec. 1401(b)(2) )
Note: Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.
There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.
Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA's forecasts, especially the longer-range ones, are subject to change. Last year, the OCA correctly projected that the Social Security wage base would remain at $118,500 in 2016.
The Social Security Administration's Office of the Chief Actuary (OCA) has projected, under two out of three of its methods of forecasting, that the Social Security wage base will increase from $118,500 for 2016 to $126,000 for 2017.
As you know, complying with the payroll tax laws can be very confusing and convoluted. Therefore, it is wise to seek the counsel of an experienced CPA to help you avoid unnecessary penalties and headaches!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
