Social Security has become the third rail of politics. If a candidate has a plan to fix it, it is scrutinized. If a candidate does not have a plan to fix it, they are vilified. As the population rises and people are living longer, the pot is getting smaller and smaller.
As a result, in its attempt to keep money flowing through and funding the program, the Social Security Administration's Office of the Chief Actuary (OCA) has projected that the Social Security wage base will increase from $113,700 for 2013 to $115,500 for 2014.
We all know about this tax but maybe the correct names and a review of rates will set the stage. 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 employees and employers is 7.65% each—6.2% for OASDI up to the wage base, and 1.45% for HI (no maximum). Also, there is a 0.9% additional Medicare tax that applies to all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). An in-depth review of this tax is in our previous two-part blog titled “Health Care Reform: Timeline of Tax Changes 2013-2018." In effect, this makes the Medicare tax rate 2.35% for wages in excess of those amounts.
For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. The 0.9% additional Medicare tax similarly applies to 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). In effect, this makes the Medicare tax rate 3.8% for self-employment income in excess of these amounts.
To achieve parity with employees working for a company, self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income, just like companies who deduct the half of the tax that they pay.
So what may happen in 2014 and beyond? The 2014 projections were included as part of the annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs (The 2013 OASDI Trustees Report). The SSA provides three kinds of forecasts for Social Security wage bases (intermediate, low cost, and high cost). The SSA intermediate forecasts through 2022 are as follows:
- 2014 — $115,500
- 2015 — $118,500
- 2016 — $123,600
- 2017 — $130,500
- 2018 — $137,700
- 2019 — $144,900
- 2020 — $152,100
- 2021 — $159,000
- 2022 — $165,600
Based on the OCA estimate, on a salary of $115,500 (or more), an employee and his employer each will pay $8,835.75 in Social Security tax in 2014.
Based on the OCA estimate, a self-employed person with at least $115,500 in net self-employment earnings will pay $17,671.50 for the Social Security part of the self-employment tax in 2014.
The Social Security wage base is also projected to be $115,500 in 2014 under the low cost and high cost forecasts. In addition, the OCA projected, as part of the high cost forecast, the possibility that the Social Security wage base might reach $167,400 in 2022.
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 in its 2012 annual report that the Social Security wage base would increase to $113,700 in 2013. We think you can pretty much bank on the 2014 estimates now.
And if all of this wasn’t’ depressing enough, the OCA is continuing to projected that the Social Security trust fund will become insolvent in 2033.
Let’s face it, not many people believe they can rely solely on Social Security to maintain a good quality of life after retirement. Pensions, all though fewer exist today, 401K and IRA accounts have become the norm in augmenting the Social Security money we all hope is there when we retire. But, how many think about prudent tax planning as a way to help fund retirement? It can be done, and at Drucker & Scaccetti, we do it for our clients every day with zealous advocacy.
Click the “Ask A Tax Warrior” link below to get in touch with one of our highly-skilled advisors. Our tactical tax planning services are designed to help you keep more of what you earn. At Drucker & Scaccetti, we are always prepared to help you with this or any other tax-related matter.