Riverwoods, Ill. -- Highly-paid wage earners will see a moderate increase in the wage base on which Social Security taxes are due for 2005, according to CCH INCORPORATED (CCH), a provider of tax and accounting information and software and a Wolters Kluwer company. The 2005 wage base of $90,000 is $2,100 higher than the 2004 amount, and the maximum additional Social Security tax that might be collected on someone earning above the 2004 wage base is $130.20.
The tax increase will show up in the amount of FICA (Federal Insurance Contribution Act) tax deducted next year from the paychecks of those earning above the 2004 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.
Avram Sacks, J.D., Social Security analyst with CCH, noted that 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.
"This means that high-earning, self-employed individuals may owe as much as $260.40 in additional self-employment tax in 2005," says Sacks. "However, they can recoup some of this amount through a deduction on their federal income tax."
About 9.9 million workers will be affected by the higher wage base in 2005.
Increase More Than Estimated
The wage base for 2005 is $300 more than the highest estimated increase published in the 2004 Annual Report of the Board of Trustees of the Federal Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds issued in March of this year. The 2005 wage base reflects national average wages for 2003, the variable upon which the 2005 wage base formula is based. The 2003 national average wage index of $34,064.95 is 2.44 percent higher than the 2002 national average wage index.
"This is more than the 1.98 percent increase predicted in even the most liberal scenario by the Social Security trustees in their March report," says Sacks.
Consequences for Revenues, Benefits
"The wage base also is a benefits base," says Sacks. "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."
For the second year in a row, there will be no increase in the amount of wages a domestic worker can earn without being subject to FICA taxes. In 2005, you can pay a domestic worker, such as a maid or nanny, up to $1,400 without having to wrestle with federal withholding on wages.